I am often asked. ‘Which type of broker should I prefer?’ To be honest, I can’t answer this question since the features they provide can be advantageous for one but not for other.
However, I offer you a detailed perspective of different types of brokers. So that, you decide yourself whether that type of broker is for you or not.
So you should start with learning your options. Unless you are a loyal customer to a café, you would ask for a menu first, right? It’s also same when it comes to different types of brokers.
What are the different types of brokers? What is ECN or Electronic Communications Network? What is STP or Straight through processing? What is DMA or Direct Market Access? What is NDD or non-dealing desk?
You will get answers to all these question, So keep reading the article.
There are mainly two types of brokers. Dealing Desks (Market makers or MM) and Non-Dealing Desks (Non-Market makers or Non-MM).
Dealing Desks Brokers
Dealing Desks brokers are one of the types of brokers basically Market Makers which can be abbreviated as MM. Instead of applying commission, they charge you with spread. In return they provide you liquidity.
People who trade with MM brokers often complain that the broker manipulate spreads to profit more. On paper, spreads should getting wide and tight according to market.
But in reality, sometimes the spreads are fixed and the brokers compete each other by their value of spreads. For more information about spread, you may read our spread article.
MM brokers dislike scalpers who buy and sell in very short time. Sometimes the brokers don’t even pay their profits if they declared scalping as disallowed. If you want to learn more about scalping, you may click here for our scalping article.
In fact Dealing Desk Brokers form a market for customers so market makers takes place of the counter side of the trader. For example in Dealing Desks, if you lose money, the lost money actually goes to broker.
So now you might think like ‘isn’t this conflict with my interests?’ Well, it’s not conflicting with your interests.
Market makers enables both selling and buying quote. So that means they meet customers’ needs when buying or selling order. Thus, we can conclude that it’s no different than deciding of a random trader.
MM adjust the prices while orders are filling, thus there is almost no risk for broker if they declare a fixed spread.
Moreover, if you are a dealing desk customer you won’t be able to see the real interbank rates. But don’t worry! The competition level is so high among other brokers so that dealing desks brokers offer a very close rate compared to interbank.
Suppose that you want to give a buy order of 1,000 Unites of USD/GBP from your market maker broker.
The broker will search for a sell order to match your buy order from their clients. Because with this method, they don’t take risks and they are still making profits from the spreads. But, assume that that there isn’t matching trade order. Now what?
The broker will take risk with taking opposite side of your trade.
Be careful though, different brokers have different approach to risk management. So you should read your own broker’s policy to understand it.
Non-Dealing Desks Brokers
NDD Brokers are one of the types of brokers that enables you to direct access to the interbank. In other words, they will never take the opposite position of you. They are simply a middleman to connect two sides.
Non-Dealing Desks can be separate as two category. Straight Through Processing (STP) is one of them. The second one is when the both Straight Through Processing and Electronic Communication Network together.
If the broker is honest NDD broker, you can make trading executions during the declaration of economic developments with any form of restrictions.
But be aware, since the spreads aren’t fixed. It can be quite wide spreads meanwhile of these important announcements since fluctuations of price increases.
STP or Straight Through Processing
At this type of brokers, All the transactions are made automatically and executed instantly on the interbank without intervening of any broker.
But how do they do it?
Many liquidity providers deal with STP brokers and they all have their own ask and bid prices.
Assume that there are 2 different liquidity provider which made deal with your broker. Their ask and bid prices are as shown below:
- Liquidity Provider 1 : Ask Price= 1.1415 , Bid Price = 1.1413
- Liquidity Provider 2 : Ask Price= 1.1414 , Bid Price = 1.1412
Then your STP brokers rank these quotes from best to worst. So which provider is best here? Well, it depends whether you want bid side or ask side. If you are on bid side, you the best price 1.1413. But if you are on the ask side, best price is 1.1414.
As a result, your new bid/ask price is 1.1413/1.1414. But I have a bad news for you. This isn’t the quote that will see on your platform.
Since your broker wants to make profit also. The broker will charge you with a fixed markup. If they charge you with 1-pip, the new bid/ask quote will be 1.1413/1.1416.
ECN or Electronic Communication Network
ECN is one of the most common types of brokers. ECN brokers provide live order book data. So this increases transparency of market with giving data to all customers. ECN is one of the Non-Market Brokers type. ECN brokers often charge you with commission fees by the volume you traded.
With being a customer of ECN, you can see the ‘depth of market’. But, what is depth of market?
The buy and sell orders of other traders of the market shown in the depth of market.
Difference between STP and ECN
Let’s compare between different types of brokers. The difference between Straight Through Processing and Electronic Communication Network is that brokers of STP has Direct Market Access.
Direct market access is connecting customer directly to foreign exchange market that makes completion of a transaction.
I hope the article was helpful for you. Thanks for reading. You may also check my top forex brokers list. It can help you to find the best forex broker for you. Please comment below if you have any form of question about the different types of brokers. I will try to answer all.