At the beginning stage of choosing a forex broker, let’s consider between a dealing desk or a non-dealing desk broker. It is likely similar to the fact that you are not sure what to order in a restaurant right after arriving there even if you are their frequent client. Looking at the options and offers in the menu is the very first thing you want to do there.
About the Forex brokers, there are two main types to consider:
- Dealing desk brokers (DD) : also known as Market makers
- Non-dealing desk brokers (NDD): are divided into two types
- Straight Through Processing (STP), and
- Electronic Communication Network _ Straight Through Processing ( ECN+STP)
Who are dealing desk brokers?
They are just Forex brokers but operate through Dealing Desk (DD). They are known as “Market makers” because they earn money by providing liquidity to clients and by spreads.
Literally, They create a market for their client and in other words they put their hand on client trade.
Is there a conflict of interest? you may ask
Actually, no. As Market maker they can quote both selling and buying price, they can fulfill both selling and buying orders of client. Furthermore, they are not interested in individual trader’s decisions.
As the price controlled via the the number of filled orders by the market makers, they can reduce the risk of setting FIXED spreads ( the reason is explained in later part).
Furthermore, the real interbank market rates are unavailable for Dealing Desk brokers’ clients to access. However, it is not a matter to be scared. The rates among Dealing Desk Brokers are set near to the interbank offer to be more competitive. The basic process of Dealing Desk brokers’ trading are as below:
Let’s take an example
- You order a buying of EUR/USD at 100,000 units with your Dealing Desk broker
- Your brokers will firstly try to match your order with its clients’ selling orders or to proceed your order to a liquidity partner, such as a substantial body which is ready to buy or sell a financial resource.
- Hence, their risks are reduced whilst they are benefited from spread without putting their hands on your trade.
However, they are responsible for taking the other side your trade in case of there are no matching.
Regarding the different risk management policies between Forex brokers, you should discuss with your broker about this matter.
Who are Non-dealing Desk brokers?
This type of brokers, Non-dealing Desk brokers, do not proceed traders’ orders via a Dealing Desk.
This means that brokers play as a link between the two parties, not the other side of their client’s trade.
NDDs are also as bridge builders: they will create a link between an untraversable areas and a hard-to-pass land to connect them.
NDDs sometimes charge commission of trading or lightly increase the spread to set a markup.
NDD brokers also plays as STP or STP+ECN
Identification of STP broker
Although there are a number of brokers practically employing a Straight Through Processing system, they introduce themselves as ECN brokers.
The orders of traders under this type of Forex Brokers’ system will be proceeded directly to liquidity providers that are accessible to the interbank market.
As there are a wide network with many liquidity providers. NDD STP Brokers can have different quoting bid and ask price.
For example, with accessibility with three different liquidity providers, your NCC STP brokers can see three different pairs of bid and ask prices through their system
According to this table, the system shows the sort of the bid and ask prices in different levels. To sell high, the best match of bid quote is 1.3000. Conversely, to buy low, the best match of ask quote is 1.3001. In other words, the bid/ask quote is 1.3000/1.3001.
These quotes are of course invisible to you on your platform, a trader.
There is nothing free which helps brokers earning money. They don’t want traders to access throughout these sorting quotes for free.
There always a small added compensation that brokers applied as a markup. For example, a broker with the policy of 1 pip markup will show you the quote on your platform as 1.2999/1.3002.
Generally, 1 pip spread would increase to 3 pip spread appearing on your trading platform.
Then, your order of 100,000 units of EUR/USD at 1.3002 will be proceeded through your broker to liquidity provider A or B.
If liquidity provider A or B is shorting 100,000 units of EUR.USD at 1.3001, your order will be processed and you are long in position of 100,000 units of EUR/USD at 1.3002. So, the compensation for your broker is 1 pip.
Regarding this changing quote of bid/ask, most of STP brokers offer a variety of spreads. In case that their liquidity provider offers a wide spread, they are unable to widen their spreads.
Although there are some STP brokers have fixed spreads, the majority is offering variable spreads.
Identification of ECN broker
When the traders’ orders are able to link with the other orders of all participants in the ECN, this is truly an ECN Forex broker.
The participants on this platform, such as banks, retail traders, hedge funds or other brokers, are trading with each other by offering their best bid and ask quotes.
The ECN clients are accessible to the “Depth of Market”.
This Depth of Market indicates the place of the buying and selling orders of other participants.
Regarding the nature of ECN, ECN brokers are unable to make a fixed markup and they are compensated with a small COMMISSION.
Overall, the above explanation would help traders to identify the advantages and disadvantages of Dealing Desk/ Non-Dealing Desk Brokers.