Forex trades are facilitated by brokers, and as you begin your day trading career, it’s important that you fully understand the different types. In general, Forex brokers fall into two different categories: Dealing desk brokers and no dealing desk brokers.
So which one is the best? Well, it depends on your trading style. Each has their own advantages and disadvantages, and they offer different methods for entering and exiting trades. For example, some offer tighter spreads, but charge commission, while others have wider fixed spreads but don’t take a commission on each trade. Each broker will offer the trader an electronic trading platform to enter and exit trades, but the biggest difference is how these trades are set up.
Here’s a look at the different types of Forex brokers:
Dealing Desk Forex Brokers (DD)
This type of broker is called a “market maker,” which essentially means they can quote their own prices and they often trade against your position. For example, a dealing desk broker will take a counter position to you, and in effect, your losses are profit for the broker or one of the broker’s clients. Thusly, the majority of trades are fulfilled using the broker’s own liquidity.
Dealing desk broker make their money on the spread – the difference between buy and sell prices for a currency – and they don’t take commissions. Yet, as market maker, the broker sets their own fixed price quotes, and sometimes these prices differ from actual market prices. Also, since winning trades are often fulfilled through the broker’s own liquidity pools, you often won’t be passed onto the interbank market to be paid.
No Dealing Desk Forex Brokers
Unlike DD brokers, no dealing desk, or NDD, brokers enable traders to buy directly through the interbank market, meaning the broker links up two parties on the interbank market who want to make opposing trades. These trades are facilitated through the broker’s electronic platform. One difference is that the spreads offered by NDD brokers are not fixed, but variable. And thus during market volatility, the spreads can quickly widen. NDD brokers also can make money on the spread, or they may choose to charge a commission as well.
In general, there are two major types of NDD traders – STP and STP + ECN brokers. STP means Straight Through Processing and that means the that the broker offers fully digital trading through the interbank market without interfering with trades. In effect, trades are quickly filled and processed. ECN, or Electronic Communication Network, means the broker also provides real-time order book data, which increases the transparency of the trading.