Types of Forex Brokers
It’s necessary to find out what your choices are in your first step in choosing a forex broker. You don’t just go to a restaurant, knowing what to order instantly, do you? Not unless you’re a regular customer there, certainly. Usually, you look into their menu first to check out what they can serve you.
There are two major types of forex brokers: Dealing Desks (DD) and No Dealing Desks (NDD). Dealing Desk brokers are also known as ‘Market Makers’, while ‘No Dealing Desks’ brokers can be further subdivided into STP (Straight Through Processing ) and (ECN) Electronic Communication Network.
Dealing Desk Broker – What is it?
Brokers that operate their business through Dealing Desk (DD), also called ‘market makers’, make money through spreads and providing liquidity to forex traders. Dealing Desk brokers straightly create a market for their clients, meaning they often execute trade against of their client’s trade. Market makers provide both a sell and buy quote, meaning they are filling both buy and sell orders for their traders.
No Dealing Desk Broker – What is it?
As the name signifies, No Dealing Desk (NDD) brokers do NOT operate their traders’ orders through a Dealing Desk. Meaning, they do not take any position against their clients’ trade as they just link two parties together.
NDD brokers can either charge a very small commission for trading or just put a markup by increasing the spread slightly. No Dealing Desk brokers can either be STP or ECN.
What is an STP broker?
You will find many brokers claiming that they are ‘TRUE ECN’ brokers, but actually, they just have a Straight Through Processing system. This type of brokers are connected to one or several liquidity providers and forwards the trades of their clients direct to the liquidity provider that currently offer the best price. NDD STP brokers typically have several liquidity providers, with each provider quoting its own bid and ask price.
What is an ECN Broker?
True ECN brokers, conversely, allow their clients to execute orders interacting with the orders of other participants in the ECN. Participants could be retail traders, banks, hedge funds, as well as other brokers. Which mean, participants trade against each other by accepting the best bid and ask prices.
ECN brokers also allow their clients to observe the ‘Depth of Market’. Depth of Market shows where the sell and buy orders of other market participants are.