TYPE OF FOREX BROKERS (2024)

There are two main types of forexbrokers:

1. DealingDesks (DD)

2. NoDealing Desks (NDD).

Dealing Desk brokers are also called MarketMakers.

No Dealing Desks can be furthersubdivided into:

1. Straight Through Processing (STP) and

2. Electronic Communication Network +Straight Through Processing (ECN+STP).

What is aDealing Desk Broker?

A dealing desk broker – also known as a‘market maker’ – will take trades from its clients without necessarily tradingin the underlying market itself. They will offer a quote based on theunderlying market price, and then sit on the other side of the client’s trade.

When a dealing desk broker accepts atrade, they may or may not trade in the underlying market to cover theirexposure. They may also offset this exposure with other clients’ opposingtrades that are similarly kept ‘in house’. This practice of keeping trades inhouse is known as running a ‘B book’, and it enables dealing desk brokers tokeep all of the profit on its clients’ losing trades.

Let’s say you place a buy order forEUR/USD for 100,000 units with your Dealing Desk broker.

To fill you, your broker will first tryto find a matching sell order from its other clients or pass your trades on toits liquidity provider, i.e. a sizable entity that readily buys or sells afinancial asset. By doing this, they minimize risk, as they earn from thespread without taking the opposite side of your trade. However, in the eventthat there are no matching orders, they will have to take the opposite side ofyour trade.

What isaNoDealing Desk Broker?

When a company says it has a ‘no dealingdesk policy’it means that it provides trading with immediate execution inthe underlying market.

This is different from trading through adealing desk, where the broker is likely to remain on the other side of yourtrade. With the ‘no dealing desk’ model, the broker offsets its exposure on itsclients’ trades by matching each trade in full in the underlying market. Whenthere is no dealing desk, the company might onlyprofit from the dealingspreadper trade. They will have no financial interest in whether yourtrade makes or loses money. You will have access to ahigh-liquidity poolfull of competitive bid and ask prices, and you will know that – whateverposition you take – your broker is not taking a position against you.

What is an STPBroker?

STP brokersor Straight ThroughProcessing brokers, is the name given to brokers that, when upon receipt of aclient order, will pass on the orders directly to their liquidity provider.Liquidity providers can include a Bank, a Hedge Fund, Investment corporationsor another broker and as such no intermediary in the order will be involved –in other words theSTP brokerwill not be filtering the ordersthrough a Dealing Desk. The absence of a Dealing Desk intervention is whatmakes the broker’s electronic trading platform STP.

With the absence of such an intermediaryprocess (dealing desk) the STP broker will be able to process its client’sorders without any delay and in addition the STP broker will not send re-quotesto its clients something that most investors will regard as a huge advantage,as the STP broker in effect will allow its clients to trade during the releasetimes of financial news without any restrictions.

STP brokers benefit from having severalliquidity providers as an increase in the number of providers in the systemmeans the better the fills for the client. A large number of STP brokers willuse banks, which trade on the Interbank market (the top-level foreign exchangemarket where banks exchange different currencies) as their liquidity providers.Let’s say your NDD STP broker has four different liquidity providers. In theirsystem, they will see four different pairs of bid and ask quotes.

Their system then sorts these bid and askquotes from best to worst. In this case, the best price in the bid side is 1.2565(you want to sell high) and the best price on the ask side is 1.2575 (you wantto buy low). Your broker will add asmall, usually fixed, markup, if their policy is to add a 1-pip markup.

So when you decide to buy 100,000 unitsof EUR/USD at 1.2575, your order is sent through your broker and then routed toeither Bank C or A. This changing bid/ask quote is also the reason why most STPtype brokers have variable spreads. If the spreads of their liquidity providerswiden, they have no choice but to widen their spreads too.

What is an ECNBroker?

An ECN broker isaforexfinancial expert thatuses electronic communicationsnetworks (ECNs) to give clients direct access to other participants in currencymarkets. Because an ECN brokerconsolidatesprice quotations fromseveral market participants, it can generally offer its clients tighter bid/askspreads than would be otherwise available to them.

ECN brokers are non-dealing desk brokers,meaning that they do not pass on order flow to market makers. Instead, theymatch participants in a trade electronically and pass the orders to liquidityproviders. Since anECNbroker only matches trades between marketparticipants, it cannot trade against the client, an allegation often directedagainst some unscrupulous retail forex brokers. Because ECN spreads are muchnarrower than those used by everyday brokers, ECNbrokers charge clients afixed commission per transaction.

An ECN broker facilitates trades forinterested investors across the ECN. Working with brokers of this nature oftenresults in lower fees as well as additional trading time availability becauseof how the ECN functions.

Dealing Deskvs. No Dealing Desk Forex Brokers

Usually, day traders and scalpers preferthe tighter spreads because it is easier to take small profits as the marketneeds less ground to cover to get over transaction costs.

Meanwhile, wider spreads tend to beinsignificant to longer term swing or position traders.

Below we have added a summary of themajor differences between Market Makers, STP brokers, and STP+ECN brokers:

*The information presented above is intended for informative and educational purposes, should not be considered as investment advice, or an offer or solicitation for a transaction in any financial instrument and thus should not be treated as such. Past performance is not a reliable indicator of future results.