Forex Broker Types

 

Dealing Desk and Non Dealing Desk Forex Brokers

Dealing Desk Brokers

  • Dealing desk brokers (DD) create a market for their clients, often taking the other side of a client's trade.  They make money through their spreads and providing liquidity to their clients.  They are also called “market makers”.  DD brokers provide both a buy and a sell quote, and are impartial to individual traders.
  • Clients of dealing desk brokers do not see the real interbank market rates since market makers control the prices at which orders are filled.  Rates are still close, if not the same, to interbank rates because competition is so fierce between brokers. This means that fixed spreads are very unlikely.
  • If you placed an order for GBP/USD for 100,000 units, your broker will look at its other clients to try and find a matching sell order, or it will pass your trades onto its liquidity provider.
  • Risk is minimized this way, and the broker still earns money through the spread without having to take the opposite side of your trade.  Different brokers have different risk management policies in place so it’s always good to check with your broker first.

Non-dealing Desk Brokers

  • Non-dealing desk brokers (NDD) do not take the opposite side of their clients trade.  They directly link two parties together.
  • NDD brokers make money by charging a small commission or by marking up the spread slightly.  They are building a bridge for you connecting two areas.  Either they are STP or STP+ECN.

STP Broker

  • STP stands for Straight Through Processing system.
  • Orders are routed directly to their liquidity providers who have access to the interbank market.  Three different pairs of bid/ask quotes will be listed if your NDD STP broker has three different liquidity providers.
  Bid Ask
Liquidity Provider A 1.2998 1.3001
Liquidity Provider B 1.2999 1.3001
Liquidity Provider C 1.3000 1.3002

 

  • Bid and ask quotes are sorted from best to worst.  The best price listed on the bid side is 1.3000 (obviously you want to sell high), and the best price listed on the ask side is 1.3001 (you want to buy low).  Therefore the bid/ask price is now 1.3000/1.3001. However, this will not be the price your broker lists on the platform.
  • Brokers add a tiny, usually small markup as a form of compensation.  The quote you would see on your platform would be 1.299/1.3002 if your broker’s policy is a 1 pip markup.  
  • If you were to place an order for 100,000 units of USD/EUR at 1.3002, your order goes to your broker and then to liquidity provider A or B.
  • Once your order is confirmed, one of the two liquidity providers will have a short position of 100,000 units of USD/EUR 1.3001, and you will have a long position of 1.3002.  1 pip of revenue will be earned from your broker.
  • Variable spreads are a direct result of these changing bid/ask quotes for most STP type brokers.  Spreads widen when the spreads of the liquidity providers widen.  Fixed spreads are offered with some STP brokers, but most brokers have variable spreads.

 

ECN Broker

  • ECN stands for Electronic Communications Network. True ECN Forex Broker allow orders from their clients to interact with the orders of other participants in the ECN. People participating in the ECN trade against each other by offering their best bid and ask prices. Retail traders, banks, hedge funds, and even other brokers are all participants.
  • Clients are also allowed to see the “Depth of Market” in an ECN broker. Depth of Market shows where the buy and sell orders of other participants are.  It is hard to place a fixed mark-up on an ECN broker, so they are usually compensated through a small commission.


Which Type of Broker to Choose

Major differences between STP brokers, market makers, and STP + ECN brokers are listed in the chart below:

Dealing Desk (Market Maker) No Dealing Desk (STP) No Dealing Desk (STP+ECN)
Fixed spreads Most have variable spreads Variable spreads or comission fees
Take the opposite end 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 requotes Automatic, no requotes
    Displays the Depth of Market (DOM) or liquidity information

 

Brokers are in this to do business with you, not put you out of business. If you lost all of your money in trading, brokers will lose customers. They are not out to get you! Clients who breakeven would be ideal clients.

 

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