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3 Conclusion
Fixed spreads
Price Manipulation is possible. Traders cant see the real market quotes.
Transparency of dealing desk brokers differ depending on their own company rules.
Act as an intermediary
o No dealing desk = No market making = Straight-through processing
o Straight-through processing enables the trade process to be conducted
electronically without manual intervention
o Providing access to the interbank market without dealing desk. All orders are
passed to Liquidity Providers(LP) directly.
In the retail fx markets usually there are 2 type of NDD forex brokers: Regular STP
Forex Brokers & ECN Forex Brokers.
Better&Faster fills. Because all Participants or liquidity providers compete for prices in
a real market.
Transparency.
Liquidity providers act as supplier for forex brokers. Both LPs & forex brokers need to
make money.
With NDD Forex Brokers, LP(s) are the counterparty to you trades. They take the
opposite side of your position, and looking to make money by closing this position later
in a trade with another party.
Make money through spreads mark-ups. They add small mark-ups on the best bid and
ask rates they get from LPs. For example, adding a pip to the best bid price or subtracting
a 0.6pip to the best ask price of their LPs
No dealing desk & No dealer intervention. Clients orders are directly sent to a certain
number of liquidity providers (Banks or Other Brokers)
More liquidity providers means more liquidity and better fills for the clients.
Those STP Brokers that have fixed spreads wont adjust spreads based on the lowest
bid/ask prices offered by LPs. The fixed spreads they charge are higher than the best
quotes they get from LPs. They may use their back-office price matching system to make
sure they can make profits on spread difference while hedging the trades with LP(s) at
better rates at the same time.
Direct access to the market. All orders are passed to LPs directly
Trader can place orders with LPs( banks, market makers, other brokers etc).
Only Market execution. STP brokers that offer Market execution provide true Direct
Market Access (DMA)
o Market execution is more transparent. Orders go to the market,and are filled
based on available quotes from LPs.(STP+DMA brokers will add a small mark-up
in order to make profit)
o Instant execution is less transparent. Orders dont go to the market. They are
instantly filled by the broker, who then may (or may not) offset own risks with
LPs. Some STP Forex brokers fill clients orders though Instant execution,after
which they hedge these orders with their LPs in order to make profits. If there are
no profitable hedging opportunities when traders submit their orders,they may
experience re-quotes.
Orders are facilitated by brokers. The broker is not a market maker or liquidity
destination on the DMA platform it provides to clients.
Platforms build a fixed mark up into the clients dealing price and/or charge a
commission.
ECN forex brokers always offer DMA, some STP brokers offer DMA
There are no re-quotes, rate rejections or partial fills with the DMA model because their
liquidity providers are committed to their bid/ask offers
Competitive prices
Transparency
STP+DMA brokers have more liquidity providers thus better prices for clients.
STP+DMA brokers always offer variable spreads,some STP Forex brokers offer fixed
spreads
DMA model allow all trading style:scalping,news trading, swing trading,position trading
etc.
ECN brokers pass your trades to an ECN pool, in which other liquidity providers(banks,
hedge funds, brokers, individual traders) become a counterparty to your trade.
All participants (banks, market makers and retail traders) trade against each other by
sending competing bids and offers into the system.
Participants get the best offers for their trades available at the time.
Makes money only through commission. ECN brokers do not make money on
spreads(bid/ask difference).
Display the Depth of the Market (DOM) in a data window. Traders can show their
order size and other traders can hit those orders. Then can see where the liquidity is.
ECN Benefit
ECN is the most transparent model. ECN Forex broker provides a marketplace where
all its participants trade against each other real time.
STP+DMA Brokers will also add a small mark-up to make profit. ECN Brokers charge
commission.
Both have DOM (Depth of the Market) orders book. STP+DMA Brokers usually dont
show it to you.
Hybrid Model
Many brokers offer dealing desk account, ECN account or STP Account at the same time.
Traders can choose the one they like.
Cents Account or Mini Account of a STP broker is usually the account that has a
dealing desk. All small orders by traders (usually below 0.1 lot) cant be sent to the
liquidity providers, because they dont accept small orders based on the contract they
have with the forex broker.So they usually use dealing desk model for this type of
account. .
Usually for orders above 0.1 lot, STP brokers send orders directly to its liquidity
providers with STP Model.
Conclusion
Dealing desk brokers or Market makers make money on spreads and when clients lose
trades. More winning traders will increase the operational risk of a dealing desk broker.
No dealing desks brokers are more transparent. They want their clients to win because
clients losses are not their profit,and the more clients trade, the more profit for
them(through commission or small spread mark-up).
Not all forex brokers will be honest with you,so whether you choose ECN , STP, or
market maker,its important to trade with the broker that has a good reputation.