A Forex broker is an intermediary between the Forex Interbank market and clients, with all Forex brokers supplying the same basic service. But, we can distinguish different types of brokers. Before you sign up with a new Forex broker, it’s important to understand that not all Forex brokers are the same as they’re structured on different trading models and make money in different ways.
The Forex Brokers can be separated into two major categories:
- Dealing Desk Brokers (DD) or Market Makers;
- Non-Dealing Desk Brokers (NDD) which can be divided into two categories:
- Straight Through Processing (STP);
- Electronic Communication Network + Straight Through Processing (ECN+STP);
Types of Forex Brokers
Dealing Desk Brokers
Dealing Desk Brokers, also called market makers, is where the broker sets their own price rates for currency transactions. In essence, a Dealing Desk Broker will fill their clients’ trades by taking the counterparty of the trade. This means the Forex Broker trades against its own client base.
In a Dealing Desk environment, there is obviously a conflict of interest because the Forex broker makes money not only from charging you a spread but they also profit from your losing trades. However, the main advantage choosing a Dealing Desk Broker is that they require a very low amount of money to open an account with.
Non-Dealing Desk Brokers
The Non-Dealing Desk market environment is designed to give you true pricing and true execution with no price re-quotes. A Non-Dealing Desk Broker will automatically offset and then transfer your orders directly using the Interbank market. This allows you to bypass the dealing desk and only trade against the market.
Unlike the Dealing Desk Broker, a Non-Dealing Desk Broker will not keep clients’ orders internally, which means there is no conflict of interest. However, the main disadvantage of a Non-Dealing Desk Broker is that the minimum amount to open an account is usually higher.
ECN Forex Brokers
ECN is derived from Electronic Communication Network and is a trading network focused on execution of currency transactions in a direct manner. The price quote you receive from your broker is derived directly from the Interbank market. An ECN broker will give traders the opportunity to interact with each other as the buy and sell transaction are matched by the liquidity providers.
The main benefit of using an ECN Forex Broker is the fact that you have access to the Interbank market, but the main disadvantage is that if there is not enough liquidity to execute your order, you’ll often get re-quotes.
ECN+STP Forex Brokers
STP is derived from Straight Through Processing and this type of Forex Brokers operates in a Non-Dealing Desk environment. An STP Forex broker operates the same way as an ECN broker does, but the only difference is that it’s processing orders in a more efficient way. Unlike an ECN broker, an STP broker can also act like a Market Maker if your order cannot be executed in the Interbank market. This will ensure that your order will not get re-quotes and you will almost certainly you’ll get your order filled.
The main disadvantage of an STP Forex Broker is that you’ll receive dynamic (varying) spreads that connected to market volatility and available liquidity.