Different forex broker types

Since CFTC (the forex regulatory body in United States) passed Commodity Exchange Act and the Commodity Futures Modernization Act online forex brokers have flourished, opening a forex account with any of these brokers is as simple as buying anything else online.

As a result, there is tremendous competition among forex brokers. They offer different features which have varying advantages. However, choosing a broker is not an easy task for any new or experienced trader. Here, we explain the different kinds of brokers.

Forex brokers are classified into Dealing desk (DD) and non-Dealing desk (NDD) brokers (which can be further divided into Straight Through Processing (STP) and Electronic Communication Network (ECN).

Dealing desk (DD) brokers

Dealing desk brokers make their money by spreads and trading against their clients. Don't panic! It does not mean there is a conflict of interest. Dealing desk brokers are indifferent to the buy/sell decision of their clients. Since these forex brokers create a market, they are also referred to as "Market Makers".

You should know that with Dealing desk they control prices and hence the spread. So you will not see the real interbank market rates. Some of you might not be comfortable with this, and should not choose them. In practice, competition between brokers bring the prices close to interbank rates. However, unethical brokers could misuse this to their advantage.

Non-Dealing desk (DD) brokers

The name says it all. They do not trade against you or pass the trade to dealing desk brokers. They connect buyers and sellers as a middle man making their money through commission or simply by increasing the spread. A non-dealing desk can be an STP or an ECN. Now let's look at the difference between the two.

STP broker

STP system simple redirects your order to liquidity providers who in turn have access to interbank market rates. Since STPs have many liquidity providers they get a quote from each liquidity provider with their own bid and ask. Now the STP broker will sort all the quotes to get the best one, then add a mark-up of couple of pips and send it to you.

Their system then sorts these bid and ask quotes from best to worst. In this case, the best price in the bid side is 1.3000 (you want to sell high) and the best price on the ask side is 1.3001 (you want to buy low). The bid/ask is now 1.3000/1.3001.

The ever-changing nature of quotes is the reason why most STPs provide variable spreads though some do offer fixed rates.

ECN broker

They match, sell and buy orders at near real-time with two opposite positions. They are connected directly to the interbank rates. An ECN is a network of large financial institutions, banks, retail traders, hedge funds and other liquidity providers.

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