Explanation of the Various Order Execution Types by Forex Brokers

Dealing desk, market makers, no-dealing desk, straight through processing, electronic communication networks, direct market access, introducing, and you could probably find another term for describing basic broker type are the terms that most sources you will find on the web use to categorize different types of Forex brokers fxoro review. The issue at hand is how to meaningfully group all of these terms.

First Thing You Need

The first thing you need to know is who runs the market for you and who your trading counterparty is. FX brokers can be divided into two categories, known as dealing desk brokers (DD) and no-dealing desk brokers (NDD). Your market is a DD broker, which means that the broker executes deals against you or is the counterparty to your trades. DD brokers are also known as market makers because they serve as market representatives (MM). They gain from both the spreads and the deals.

They prefer losers and unsuccessful traders since they generate revenue for brokers. Brokers are forced to hedge on the interbank market by winning traders on the other side, which increases their costs and makes them less desirable customers. Of course, reputable FX trading providers handle this professionally, but with certain more “exotic” brokers, if you become too successful, you may be requested to close your account and leave.

In contrast to DD brokers, NDD brokers send your orders to the “actual” market. When discussing forex, the actual market is a collection of banks, funds, and other kinds of institutional intermediaries known as liquidity providers (LPs). Better trading conditions are created with more LPs in the group, including higher liquidity and lower spread costs. STP and ECN are the two main categories of NDD brokers. Straight Through Processing and Electronic Communications Network are both abbreviations for the same concept.

Let’s begin with ECN. This is a group of LPs, and when a forex broker fxoro review, it connects to the market and gains access to the network’s liquidity and other benefits without being aware of or entering into any agreements with the other members. There are fees associated with joining and remaining a member of such a network.

When a client sends an order to an ECN broker, the order is routed out to the market and filled from the LP that has the best terms/price. Any user on the network can act as the counterparty in these deals. Due to the large number of members, clients can also benefit from the level 2 depth of the market in their trading platforms. With ECN brokers, new trading, scalping, and other specialized methods are not a problem.

STP brokers are similar to ECN brokers, except they must negotiate individual agreements with each LP rather than joining pre-existing LP pools. The better for their clientele, the more LPs it has struck an agreement with. It should be remembered that not all STP brokers are created equal. They disagree over who your trade’s counterparty is. Direct market access (DMA), which allows any LP to be the counterparty and the one with the best terms, is a service offered by several STP brokers. Some STP brokers on the other side will execute transactions against you (they will execute your order) and then hedge in the real LPs market to remove the risk.

Most of the words relating to different execution styles for Forex brokers have been explained so far. We haven’t yet talked about the introducing broker (IB). Nothing more than an existing broker seeking to increase business by reaching out their hand. IBs for DD and NDD brokers are available.

Some Firms Distinctly

While some firms distinctly identify as one sort of broker and base their marketing tactics on their benefits, it can occasionally be challenging to determine the precise style of order execution that a different Forex broker is providing. There are some facts, for instance, that can help you determine the type of broker: Level 2 quotes are only available with DMA and ECN brokers; ECN brokers charge trading commissions while others primarily profit from widened spreads; variable spreads are always offered by ECN and DMA brokers; etc. Many brokers also employ a hybrid business strategy, offering NDD solutions for Standard accounts while offering DD execution for Micro and Mini accounts, for instance.

Final Thought

Brokers advertise themselves as free brokers, but you really pay the bigger spread as a commission, so it’s not always the most affordable option for you. On the other hand, ECN brokers will collect commissions for each trade but will only provide you with the raw spread without any markup. While most retail clients may get by just fine with DD brokers, heavier traders with bigger volumes should think about trading with ECN brokers. Naturally, there are other factors to take into account when selecting a broker. Before choosing one, I advise you to read some forex broker reviews, find forex brokers, and compare forex brokers.

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