Forex brokers can be differentiated by many things, such as whether they are operating with or without a license, the available trading platforms, how the orders are executed, and many more.
The most crucial difference lies in whether your broker is a Dealing Desk (DD) or a No Dealing Desk (NDD) Forex Broker. Dealing Desk brokers are also known as market makers, and they are very popular even though they kind of bet against you. If you lose, they win, and if you win, they lose.
What we will be focusing on today are No Dealing Desk (NDD) brokers. By using technology, they route trade orders straight to liquidity providers. This ensures faster execution of orders and better prices for the customers. In a way, NDD brokers act as the bridge between liquidity providers and clients. They usually offer competitive bid/ask prices because the traders have exposure to multiple liquidity pools.
No Dealing Desk Brokers are further divided into two types:
1. Straight Through Processing (STP) Brokers
As the name suggests, this system is entirely automated without any manual intervention whatsoever. From the initiation of an order to the final settlement, everything is automatic and hence a massive time-saver. Order processing happens in real-time, as orders are sent directly from the trader to the different liquidity providers in the interbank markets. Because of the direct access to the interbank market, trader’s orders are filled at better prices.
The STP broker merely passes the orders through liquidity providers like banks, major investment corporations, hedge funds, or large brokerages, eliminating any order execution delays or re-quotes. They would be a perfect choice for scalpers and news traders.
They offer many advantages for the brokers, as well. The STP system is a lot more cost-friendly than having to operate a dealing desk. Because everything is automated in STP, there are no broker salaries to payout. STP leaves no room for human error, slippage, or re-quotes. The brokers make money by adding a small mark-up on the price.
2. Electronic Communication Network (ECN) Brokers
This digital system is similar to STP in terms of execution. ECN connects brokers, individual traders, hedge funds, liquidity providers, etc. They can, then, execute trades amongst themselves directly without the need of a middleman.
ECN is primarily used for forex currency pairs and stocks. It automatically matches financial products to buy and sell orders. Some of the most significant benefits of ECN is that it gives access to the Depth of the Market and that liquidity providers compete for greater trading volumes, which results in better prices for the traders.
The brokers make money by taking a small commission on every trade. Therefore, it becomes irrelevant whether the trade is a win or a loss because they already made their profit once the position was opened. Unlike DD brokers, the market prices from various liquidity providers are displayed, resulting in full transparency.
What’s the difference between the ECN and STP brokers?
The biggest difference between the two NND broker types is that STP brokers make money by adding a small mark-up on the bid/ask spread, while ECN brokers generate revenue from a commission on each position that a trader opens.
Further, ECN brokers will match orders placed by users of the network, so if one trader wants to go long, the system can match it to another trader who wants to go short. This means that the users of ECN can enjoy a 0-pip spread when a successful match is made.
A word of advice
The growth of the forex market has resulted in more traders and deeper liquidity. This has leveled trading costs and pushed the industry to become more competitive. The forex market is saturated with brokers promising results. Therefore, traders ought to educate themselves about all available options before making a choice.