If you are in the market for a new Forex broker, finding “the right one” can take your time and effort. Not all are created equal, and you need to know which compliments your needs and makes your banking more efficient.
There are so many varieties of brokers to choose from; each has certain advantages that might make one a better fit for you and your lifestyle. The two main types of brokers are Dealing Desks (DD) and No Dealing Desk (NDD). Dealing Desk (DD) are also known as Market Makers. On the other hand, No Dealing Desks are divided into Straight Through Processing (STP) and Electronic Communication Network + Straight Through Processing (ECN+STP).
What is a Dealing Desk Forex Broker?
A Dealing Desk (DD) brokers, also known as Market Makers, make money through spreads and arranging liquidity to their clients. These Market Makers precisely develop a market for their customers, or they take the other side of a client’s trade.
However, there’s no need to to be concerned about there being a conflict of interest. Since they supply and file both the buy and sell quotes for their clientele, they are disinterested on each trader’s individual decision.
Likewise, clients of dealing desk brokers are not able to see the real interbank market rates. However, the competition among brokers is so rigid that Dealing Desks brokers offer similar rates, if not the same, to the interbank rates. The diagram below demonstrates how trading with a Dealing Desk broker works:
Let’s simplify it further. For example, you have decided to buy an order for EUR or USD for 100,00 with your DD broker. First, your broker will try to match your order with a similar previous order or pass your trades on their liquidity provider. These providers are able to easily buy or sell a financial asset.
In doing so, they minimize the risks, while earning from the spread without taking from the other side of your trade. Nonetheless, different brokers take different risk management policies so you should discuss these details with your own broker.
What is a No Dealing Desk Forex Broker?
In contrast, the no dealing desk (NDD) Forex brokers do not transfer their consumers’ orders through a Dealing Desk. environment. No Dealing Desk brokers can either be STP or STP+ECN.
In the no dealing desk environment, brokers automatically match orders or take the other side. Normally this is completely computer driven, and instantaneous. This is one of the main advantages over the traditional dealing desk model. Usually, they charge a small commission or slightly markup the spread.
What is an STP Broker?
Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market. NDD STP brokers usually have a variety of liquidity providers, and each provider has its own bid and ask price.
Let’s clear up how brokers and liquidity providers work, by using this example. Your NDD STP broker has three different pairs of bid and ask quotes from three different liquidity providers.
Bid | Ask | |
Liquidity Provider A | 1.2996 | 1.2999 |
Liquidity Provider B | 1.2997 | 1.2999 |
Liquidity Provider C | 1.2998 | 1.3000 |
Looking at these quotes provided, the bid/ask is currently 1.2988/1.3000. However, this won’t be the quote you see on your side. Your broker worked tediously and strenuously to sort through the quotes and find the best rates for you. As compensation for their work, your broker adds a small, usually fixed, markup.
As a result of the changing bid and ask quotes, most STP brokers have variable spreads, a few do offer fixed spreads. So, if the liquidity providers widen the range of their spreads, the brokers have to likewise widen their spreads.
What is an ECN Broker?
On the contrary, True ECN brokers allow their client’s orders to interact with the orders of other participants in the ECN. These possible participants could be banks, hedge funds, retail traders, or other brokers. Therefore, these participants are constantly proposing the best bids and ask prices.
ECN usually get paid through a small commission rather than a fixed markup.
Dealing Desk vs. No Dealing Desk
Picking a Forex broker may seem like a simple task, but it’s not. Chose the wrong one, and you’ll lose valuable time and tarnish your profits. Alternatively, if you put a little diligence into selecting the right one, you can ensure your trades will reach their full potential, and your time in the market minimized. Here’s a rundown of the major differences between Market Makers, STP brokers, and STP+ECN brokers:
Dealing Desk (Market Maker) | No Dealing Desk (STP) | No Dealing Desk (STP+ECN) |
Fixed Spreads | Most have variable spreads | Variable spreads or commission fees |
Take the opposite side of your trade | Simply a bridge between client and liquidity provider | A bridge between client and liquidity provider and other participants |
Artificial quotes | Prices come from liquidity providers | Prices come from liquidity providers and other ECN participants |
Orders are filled by broker on a discretionary basis | Automatic execution, no re-quotes | Automatic, no re-quotes |
Displays the Depth of Market (DOM) or liquidity information |
Forex brokers want their clients to keep trading and doing business with them, not for you to stop trading. If all their customers lost all their money in trading, they would not have any customers left.
The optimal client/broker relationship is one where the client more or less breaks even.
Here at TopBrokers.Trade, we don’t just help you to pick a great place to trade, but also do everything that we can, to show you how to get started. For more information on trading and investments, please see our articles and tutorials sections.
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