It can get hard to choose the right Forex Broker type for your needs. You might already be aware of the different choices as NDD, D.D., ECN, and STP. Must be wondering what they are. Each one has a different potential, parameters and will execute your trade differently, giving you a different set of options and benefits. Read on to help you choose the right one for yourself.
There are two types of Forex Brokers.
- D.D. Dealing Desks- also known as Market Makers
- NDD No Dealing Desks
- are two types of NDD now:
- STP Straight Through Processing
- ECN +STP – A combination of Electronic Communication Network and Straight Through Processing
- So now, what is the Difference between Dealing Desk and No Dealing Desk Forex Brokers?
What is a Dealing Desk Broker?
Forex Brokers working with Dealing Desk brokers earn through spreads and bringing liquidity towards them. The broker’s spread in a trade is the difference between the bid and the asking price. The price you receive while selling currency is the bid price. The ask price is the price you pay to buy a currency, and the difference is the broker’s spread.
Since the D.D. brokers also generate a market, they are often referred to as the “market makers” for their clients. There is no conflict of interest.
Market makers give the sell and the buy quote as they do both- buying and selling the orders of their customers- they remain aloof to the decision of another trader. They can set Fixed spreads as they have the price control during filling of orders. The clients who use the D.D. brokers are oblivious to the real market trades between various banks. But there is no need to panic as rates that D.D. offers are close around if not the same as the interbank rates.
How do the Dealing Desk Forex Brokers trade?
Let’s say, for instance, a buying order is placed for EUR/USD for 100,000 units with your Dealing Desk broker. Your broker will find a match as per your requirements, either from clients or liquidity providers- banks and institutions. The broker minimizes the risk for you as they make money from the spread and not taking the other side of your trade. But in case there are no matching orders, then they earn from the opposite side. You must check the risk policies from your forex brokers.
No Dealing Desk Broker
The name is suggestive. The brokers do not pass the client’s orders through a Dealing Desk. They link the trading parties and do not take the other side of the trade belonging to the client. They charge a small commission or increase the spread a bit and add a markup.
The types of NDD
There are two types of NDD, STP or STP+ECN.
What is a Straight Through Processing STP Broker?
While some brokers may claim to be ECN brokers, in reality, they only have a Straight Through Processing system. The STP system brokers enroot the client’s orders directly to liquidity providers having interbank market access.
The NDD STP brokers have abundant liquidity providers. Each liquidity provider quotes their bid and ask price.
So The Bid-Ask looks like this-
Liquidity Provider R 1.2998 1.3000
Liquidity Provider A 1.2999 1.3000
Liquidity Provider M 1.3005 1.3007
Their system can sort out these bid/ask quotes in order from the lucrative most to least. In this case, the best price to bid is 1.3005 -highest, and the best price to ask is 1.3000 – lowest.
So the new bid is 1.3005/1.3000.
You want to sell high and buy low.
You won’t see this quote on your platform. Your broker is doing business, and obviously, he/she has to earn. Your broker would markup by 1pip- the usually fixed markup as per their policy.
So what you will see is 1.3004/1.3001. And you will get to see a 3-pip spread as the 1pip gets converted to a 3-pip spread for you.
So when you buy 100,000 units of the EUR/USD at 1.3001, your order is sent to the forex broker and routed to the Liquidity Provider R or A.
And once the order is received and accepted, the liquidity Providers R or A will get a short position of 100,000 units of EUR/USD at 1.3001, whereas you receive a long position of 100,000 units of EUR/USD at 1.3002.
Your broker makes 1 pip.
This is why the STP brokers have variable spreads as they are in synch with the widening of liquidity providers’ spreads. Some have fixed, yet others have variable spreads.
The ECN brokers allow the interaction between their client’s orders with those of other ECN participants. These participants include retail traders, banks, hedge funds, and other brokers. So the trade happens with the participants offering their best prices for bid and ask. The ECN gives an in-depth perspective of the market, which shows the status of buy and sell orders of others. Since it is not possible to go for the markup, the ECN brokers work on a small commission.
The European term MTF multilateral trading facility is a term for enabling financial instrument exchange between multiple parties. Only eligible participants can participate in transferring a multitude of securities, not having an official market. The orders are submitted electronically, and the software engine pairs buyers and sellers. An alternative platform is provided to the retail investors for trading financial securities. In the U.S., MTS is referred to as Alternative Trading Systems.