Forex Trading Without a Broker: Is it Possible in 2022 | LiteFinance (2024)

• Can I do stock or Forex trading without broker?
• What are brokers for, and what functions do they perform?
• Why should I pay intermediaries if I can do without them?

Those are a beginner investor's questions aimed at cutting potential expenses.

You make money from currency moves without brokers when you buy one currency at a bank or currency exchange office and then sell it at a higher price. However, this is currency speculation, and it has little to do with investing in Forex assets.

If you want to become a serious investor, diversify risks, and make profits in a few seconds, then you can't trade Forex without a broker. Read on to learn who an online broker and a sub-broker are, what their functions and advantages are, and how you can do Forex trading on your own.

Major takeaways

What is Forex Broker?

A Forex broker is a legal entity that acts as an intermediary between sellers and buyers or between Forex traders and the Foreign exchange market itself.

Private persons aren't entitled to conduct currency trades on their own, they can’t do it without a broker. All trading operations must be registered and conducted through a broker, it’s impossible to trade Forex without a broker.

Forex brokers' activities are strictly regulated and must be licensed. Foreign exchange market participants are retail Forex traders, legal persons, and institutional investors. In particular cases, a Forex broker itself can act as a counterparty in a trade.

How Forex brokers work

1. A broker company signs a contract with liquidity providers - big investment banks or ECN systems, such as Currenex or Integral. The broker also opens segregated bank accounts to keep its money and client money apart.

2. To make it possible to trade Forex, a client must make a broker service agreement with the Forex broker. Then, the client has a personal client space registered. Retail investor accounts are open in his/her name too. Next, the client tops up his/her account and sends a request to buy or sell foreign currencies using a dedicated Forex trading terminal.

3. Those requests are called "orders," and they can be executed in a variety of ways:

• The trading platforms execute the trader's order by matching it with an opposite order. For example, the broker receives two orders: to buy 100 euro and sell 100 euro at Bid and Ask prices. The broker matches those orders and earns a fee as the rest between Bid and Ask prices.

• The Forex broker redirects an order to a liquidity provider, which acts as a counterparty and executes the order.

• The trader's order is directly transmitted to the ECN system and executed at the best price.

Why do you need a Forex Broker?

Let’s figure out how to trade Forex currency pairs without a good Forex broker and what you will need for it. First of all, the retail trader should get access to the foreign exchange market through an electronic trading platform. A trader's main instrument is a trading platform. It allows a broker to load current quotes, and a trader can analyze a market situation. In a trading platform, trades are opened, and orders to sell/buy foreign currencies at a current price are sent.

You cannot get access to the terminal to trade Forex without broker. A regulated broker usually buys a costly license to get the right to use a MetaTrader and pays monthly fees for it. Then brokes develop the bridge to providers to transfer client’s trades to open global Forex market. Trading Forex is not possible without the platform and ECN technologies that the broker provides to retail clients.

You can't simply take a bag full of money, come to an international bank and say, "I want to trade Forex." They will only suggest that you make an exchange operation at the bank's rate. Only a broker can provide you access to currency buy/sell operations.

Not only does the bank lack trading instruments, but also it won't be able to offer you a margin trading mechanism. Without leverage, you'll have to own 1 million dollars to make a profit of 1 %. Without a Forex broker's system for instantaneous approval of orders, you'll have to wait for many hours for your trade to be made. You know that the price will have changed by the time the trade has been finally accepted, and your potential profit may turn into a loss.

Can a broker trade for himself?

In most cases, it can. However, there are some exceptions. Regulators impose some limits in some countries. As a result, access to foreign Forex brokers is banned, and trading without a broker is impossible.

Traders themselves can't open retail investor accounts with a foreign broker that isn't licensed by a local regulator. This system is true of the USA, Japan, and Indonesia, where strict rules apply to CFD trading. Using a sub-broker solves the problem:

1. A broker that can't access the US currency market makes a broker service agreement with a licensed broker. Another way is to register a subsidiary company in the USA that will fully comply with the US regulator's requirements to get a license.

2. A trader opens retail investor accounts with the broker (it’s possible to start from a demo account) and places an order to conduct a trade. The broker redirects the order to the US-licensed broker that executes the trade.

Thus, the trader's main broker acts as a sub-broker: not being the US market member, it resells another broker's service (prime broker) to the client. However, this scheme has two drawbacks: the more counterparties a trade has, the higher the risk and commissions are.

Ways of Trading Forex Without a Broker

Can you trade Forex without a broker? No. You can’t enter Forex without a broker. So, the next question is: which role does the Forex broker play in the trader's scheme, and who acts as a broker?

1. NDD (Non-Dealing Desk) trading with straight-through processing

If you trade Forex there are two types of order processing available:

Instant Execution. This model guarantees that the trader's order will be executed at the stipulated price. However, there's no guarantee that the order will be executed at all. It works as follows:

• A trader sends an order to open a trade at the price he/she sees on the platform.
• Sending an order and queuing it for execution requires some time during which the price may change. If it does, a broker asks a trader if the order must be canceled or executed at a new price.
• The trader makes a decision. Meanwhile, the price may change again.

Market Execution. This model guarantees that the trader's order will be executed. However, there's no guarantee that the execution price will be the best.

A Forex broker directly participates in the Instant Execution scheme. As for the Market Execution scheme, or NDD, a broker acts as an intermediary that provides a trade's technical execution. It delivers online quotes and transmits a trader's orders directly to liquidity providers or ECN systems. Orders don't get into a broker's internal system.

NDD model advantages:

• Since a broker doesn't participate in order transmission, orders are executed faster.
• Transparent spreads. It's the market that forms spreads. A broker may add a markup, but it can't change spread levels.

Check the article Principle of orders execution when trading Forex for more details on how to trade Forex without a broker and with.

2. Trading currencies without opening broker retail investor accounts.

Your options would be the following:

• Buy one currency at a bank or currency exchange office and sell it once the rate has grown. Deutsche Bank, UBS, JP Morgan, Citibank, Dukascopy - all those banks provide best Forex brokers with the liquid market. Exchanging currency for cash at a bank, you become a Forex market participant somehow, while banks can be called "regulated brokers" in that case.
• Trust management. In that case, you fully trust your manager to control your money:
  • to invest it in investment funds or ETFs related to Forex markets;
  • to buy or sell currency in a few clicks through a bank's dedicated mobile applications; to use individual investment trading accounts.

How to trade foreign exchange without a broker? Become a broker: register a legal entity, get a license, open an account, design a site, and buy a trading platform. There are no other ways.

Advantages and Disadvantages of Trading without Broker

To be clearer, I made a table:

Let's examine each of those points in detail.

Advantages:

1. Instant access to financial markets. A broker can provide over 100 instruments: currency pairs and cross rates, CFDs on shares and stock indexes, commodities, and cryptocurrencies. You can buy or sell any of those financial instruments in a second. An average trade execution period on the Forex market is up to 100 ms. It means you can have up to 10 trades executed within 1 second.

2. Risk diversification. A broker allows combining various types of strategies: manual or adviser-based ones, scalping, swing trading, intraday, and long-term strategies, correlation-based strategies, hedging, etc. If one trade turns out to be loss-making, another one may be profit-yielding.

3. Passive income services. No time to delve into trading principles? Use your broker's passive trading services! For example, copy trading. You only have to learn the basics of risk management and choose a trader. His/her trades will be copied onto your account automatically. More details on social trading can be found in the article Advantages of Social Trading over PAMM. Why did Forex copy trading system replace PAMM accounts?

4. Free technical support:

• Online quotes from the world's leading providers. You get Forex assets rates, updated every second on price charts;

• Trading platform. The software which allows analyzing quotes, structuring charts, and using technical indicators. Acquaint yourself with the features of the trading terminal without registration here.

• Demo accounts. Free account with virtual money. Better your strategies and advisers, and familiarize yourself with the platform's functions on a demo account. Free contests with real money prizes are often held in demo accounts. You can register and take part in a competition using this link.

• Short positions. You can "borrow" an asset from a broker, sell it at a higher price, then buy it at a lower price, and pay back the credit to the broker. Opening short positions is impossible without a broker's help.

5. Financial support:

• Leverage. Free credit that increases trade volumes by ten or a hundred thousand times. Using the leverage of 1:10, you can open trades for up to 1,000 USD, having only 100 USD in your account.

You can read this article for more details on leverage.

• Bonuses. You can have some goodies that increase your initial deposits by 50%-100% of a payment amount.

6. Information support:

• Training materials, including the basics of technical and fundamental analysis.

• Daily analyses and reviews from leading successful traders: opinions, ideas, and analytics.

• Seminars and webinars.

• Extra tools: economic calendar, lot/correlation/volatility calculators, and so on.

• Affiliate program. You can earn not only from active trading or copy trading but also from a referral network. Bring in new active traders and earn a percentage of their commission. A broker provides free advertising materials: banners, online business cards, landing pages, links. To learn more, you can read the article Types of affiliate programs and income-generating algorithm.

Disadvantages:

1. Occasional frauds:

One would come across a dishonest broker quite often five or six years ago. Frauds ranged from manipulations with deposits to manipulations with price charts and client trades.

Today, undisguised frauds are a rare thing, but no one can guarantee they will never happen to you.

What can you do if you got hoaxed by a broker? This article may help you out.

1. High risks related to incompetent use of margin:

• Margin trading is the most significant advantage of trading via a broker. However, beginner traders may become hostage to this advantage.
• Mere inattention and inability to control leverage may result in an instant deposit loss. In that case, it's a client that should be blamed for that.
• The other side of using leverage is the margin. Most beginners believe that the less the margin, the higher chance of not losing the deposit.
• It seems correct, but in fact, low margin requirements urge a beginner to make more trades. As a result, they accumulate like a giant snowball that draws the deposit to the bottom.

Disadvantages of trading without a broker

Let's examine them in detail.

1. Narrow list of trading tools. When it comes to investment banks, all they can offer is a few currency pairs and their own financial products. Structured notes or ETFs are popular too. And that's all. You don't have a big choice here, without even mentioning high profitability. Try not to lose money.
2. No access to margin trading. Leverage and margin mechanisms are exceptionally a broker's privilege. No one else can offer you those instruments.
3. No CFD trading. A CFD (contract for difference) is a special instrument derived from such primary assets as stocks and commodities. For lack of stocks and commodities, trading CFDs is unavailable too.
4. Trade execution time up to 24 hours and more. To buy something, you need to go through nine circles of Hell. You need to read through and sign a batch of papers. Then, you wait for your trade to be registered, and so on. You just cannot trade fast.
5. Huge spreads. Have you ever seen how the major currencies' rate is changing at exchange points? At best, the difference between buying and selling rates will be a few currency units. But spreads may go up to 80%! You may sell a currency at $10 and buy it at $18. No profit at all.

Conclusion

• Opens you access to the instruments of currency, stock, commodity, and cryptocurrency markets.
• Provides technology: executes orders and delivers quotes.
• Offers extra earning opportunities: social trading, affiliate programs.
• Provides a trading platform, calculators, technical analysis tools.
• Provides fundamental analytics, training materials, and basic knowledge.

Thus, a broker offers you unlimited opportunities for earning from any financial instruments. Your income level depends only on the level of your trading experience and expertise.

How to trade stocks without broker

The stock market is much different from the Forex market. It's the real asset market that only professionals may access. Almost anyone can do Forex trading, whereas the stock market imposes specific criteria on its members. Unless you meet them, you won't be able to trade without a representative.

If you do want to do stock trading at a stock exchange, you have several options:

1. Receive a professional participant's certificate.

Here's an example: a professional participant in stock trading is a broker. When it comes to individuals, different countries impose different requirements, but their items are almost the same.

You must have a major in finance. You must have 2-5 year experience of trading through a broker. Your portfolio must include at least four different instruments, such as stocks, obligations, open-end funds, or notes. Your investment capital must be at least 100,000 USD, on average. You must have conducted trades at least once a month within one year.

Only true masoch*sts would bother themselves with those requirements. On the other hand, you'll have direct access to trading at a stock exchange, and no one will be able to disturb you.

I think it isn't worth the candle. Stock exchange brokers are thoroughly audited. Any careless step may cost them their business, so trading through a broker is much more comfortable and safe.

2. Sign a broker service agreement with a broker.

It's the easiest and most convenient way to get access to stock trading. A stockbroker is a kind of a Forex broker, the difference being that the former is more often controlled by the stock exchange and the central bank.

Also, a trading agreement at a stock exchange must be signed in person. It's not a public offer, unlike at Forex. Then you can get full access to trading stocks, obligations, and anything that is traded at a stock exchange.

Stockbrokers' Forex services are popular these days. They say that trading through their systems is more reliable. But it is just marketing.

The Forex market is the same everywhere, no matter who is a service provider. The result will be the same. A broker's reliability isn't dependent on whether it's a stockbroker or pure Forex broker. Actually, that would-be reliability will cost you money as you'll have to pay a tax on withdrawals. It's a different story, though.

Have you noted there's no such a point as "You simply buy and sell" here? Because that's impossible! As I have already mentioned, a stock exchange member must comply with strict legislative requirements. Besides having a license, you have to be a revenue agent of the country at whose stock exchange you plan to trade.

Even if you buy stock from another physical person, it won't be yours until you register it or re-register it in a depositary. Thus, a private trader can't trade at a stock exchange without a broker!

As for ETFs, open-end funds, or depositary receipts, you can buy them only through a broker. There's no other way

Is it possible to trade Forex without a broker?

We have found out earlier that only professional market participants may have direct access to stock exchanges. Sure, there exists an opportunity to buy stocks using A Direct Stock Purchase Plan (DSPP), but it's another story.

So, let's examine the advantages and disadvantages of trading without a broker.

Advantages:

1. Access to any foreign companies' stocks, not only blue chips. Beginner traders often find it difficult to estimate potential risks, so the regulator limits the risk by providing only low-risk assets.
2. Access to foreign derivative instruments. A broker allows you to trade only your country's forward contracts and excludes risky foreign forwards.
3. Access to ETF, ETN, Mutual funds, euro bonds, etc. Only professional market participants may invest in foreign funds.
4. Access to depositary receipts. Being too complicated, these instruments aren't popular with private investors and are therefore unavailable to unqualified members.

Disadvantages:

1. Entry threshold. A professional member's minimum asset value must be at least 100,000 USD. It corresponds to a broker's authorized capital. For example, in the USA, an investor has to manage at least 100 million USD.
2. Minimum volume requirement. You must make at least a few trades per quarter at a stock exchange, and at least once a month, with a total volume of at least 100,000 dollars.
3. Qualification certificate. Your country's regulator must issue a certificate of compliance for you. For example, in the USA, it's the SEC's certificate.
4. No margin trading mechanism. You won't be able to use margin without a broker's license, as we have already found out.
5. Independent payment of tax on profit. If you're a broker's client, your broker pays all the taxes for you, and you don't have to worry about that. If you're a professional market member yourself, you fill in a tax declaration and pay the taxes yourself. I think it's an extra burden.

The solution to a high entry threshold may be trading in the OTC market of CFDs on shares. You'll need only 50-100 USD for a start. I'll provide two charts to compare the quotes.

This is the chart of the stock exchange's quotes.

They are identical. A small distinction lies in different scaling, but the quotes are almost the same. Note that the quotes of Facebook shares and CFDs on shares at Forex are just 2 cents different.

Conclusion: Trading without a broker may be interesting for small capital traders for passive long-term investing. When it comes to active trading, I recommend trading CFDs on shares in Forex industry. The trading principle is the same, but exchange fees are excluded, and the deposit of 100 USD will be enough for active trading. Also, leveragecan be used, whereas margin trading is impossible without a broker.

Conclusion

If you're planning to invest and trade seriously, you should remember that you can't trade Forex without a broker. Only a broker can provide you access to global markets, including Forex markets, and such trading instruments as currency, oil, or cryptocurrency within a few seconds. Choose the best Forex brokers and trading platforms: only they provide optimal trading conditions and high speed of orders execution. Such online Forex brokers will be your reliable partner, as they aim at successful long-term cooperation.

Are you ready? Then start with LiteFinance Client Space and make your first trade on a free demo account without registration.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.