The 2 main types of forex brokers
An important step in forex trading is in knowing your forex brokers. There are in general 2 main types of forex brokers namely Dealing Desks and No Dealing Desks or DD and NDD respectively. The DD brokers are known as Market Makers while the latter are further categorized into STP (Straight Through Processing) and ECN+STP (Electronic Communication Network + Straight Through Processing) brokers. So what does all that mean? We examine them below.
The Market Maker is the type of forex broker which makes money from spreads that are offered to you. They are called the Dealing Desk brokers where they literally the other side of the trade. They will offer the sell and buy quote where the control the prices of the orders. In doing so, their rates can be quite competitive as compared to interbank rates. You can view this concept as the broker being the ‘dealer’ on the blackjack table.
No Dealing Desk brokers on the other hand are those who do not take any side of your trade. This means that the broker is involved only to match the 2 parties together like a bridge. An STP or Straight-Through Processing broker is one who will direct the order that you place to the liquidity provider directly. This can only be done if the provider has access to the interbank market where the quotes will usually involve a small markup that the broker profits from.
Meanwhile, an ECN or Electronic Communication Network broker is one who will allow your orders to interact with others in the same network. This could be in the form of banks, retail traders and could be other brokers as well. This means that you are actually trading in something like an open market where the best bids and asking prices are offered. Apart from that, ECN brokers will let you see the Depth of Market which is where the buy and sell orders of other market participants is being shown.