In light of recent forex industry events, I thought I’d give y’all a quick rundown of what being a “No Dealing Desk” forex broker is all about. If you’re a forex newbie or if you just need a refresher on its differences with a dealing desk broker, here’s what you need to know.
Dealing Desks (DD)
Dealing desk brokers are also known as market makers. This is because they make money through spreads and providing liquidity to their clients (That’s you!) usually by taking the opposite side of their trades. In other words, they make a market by filling your buy or sell orders with countertrades.
Some say that this can lead to a conflict of interest, as there are dealing desks that might fill your orders on a discretionary basis depending on whether or not their own opposing position could turn out profitable for them, but this isn’t always the case. Ideally, market makers stick with their provided bid/ask quotes and fill clients orders while being indifferent to how the positions might fare.
More often than not, dealing desk brokers first try to find a matching long or short order from their other clients before taking a countertrade or passing it on to a liquidity provider, which is usually a sizeable entity that can readily buy or sell a financial asset. In doing so, they are able to minimize risks by earning from the spread instead of having to take the opposite side of the client’s trade themselves.
No Dealing Desk (NDD)
As you’ve probably guessed, no dealing desk brokers don’t pass their clients’ orders to a market maker or liquidity provider. Instead, their main function is to link two counterparties together, and this can involve a straight-through-processing (STP) system or an Electronic Communications Network (ECN).
An STP broker simply routes their clients orders through several liquidity providers who have access to the interbank market. Each provider typically has its own set of bid/ask quotes and the STP system ranks these prices from best to worst before the NDD broker adds a small (usually less than a pip) markup to make some money. This is why most STP brokers have variable spreads.
Meanwhile, an ECN broker enables market participants to trade with each other. These participants can comprise other retail traders, hedge funds, institutions, banks, and brokers. True ECN brokers also provide a full view of where buy and sell orders of other market participants are, allowing its clients to gauge liquidity and how the rest of the market is positioned. ECN brokers are usually compensated through small commissions instead of earning from spreads or markups.
Which type of broker should you trade with?
It’s totally up to you! There are pros and cons to each type, but it ultimately comes down to your trading style and preferences. It depends on whether you’d rather have tighter spreads but pay a commission per trade versus wider spreads but no commissions. Of course it’s also crucial to read the fine print and check reviews from other clients to see if the broker you’re eyeing really offers STP or ECN access.
For more examples, read up on our School of Pipsology lesson on Forex Broker Types or join this forum discussion on what market maker, STP, and ECN brokers really are.