There are many things to take into account when selecting a forex broker, since very little disadvantage can erode your bottom line and turn an otherwise good trading strategy into a money-losing one. As always, it is important to look at your own needs as a trader and pick an fx broker that is suitable for your particular trading style and currency-pairs. A broker that is ideal for one type of trading can be highly unsuitable in other situations. 

One of the things that you will need to decide is if you want a dealer-desk broker (DD broker) or a non-dealer desk broker (NDD) forex broker. In this article we will take a closer look at the advantages and drawbacks. 

 

ECN fx brokers 

An ECN broker use Electronic Communications Networks to send your trading order to a market where it can be matched with orders from other traders. In this regard (bringing traders together), the ECN broker is similar to a STP broker, and different from a DD broker. A DD broker (Dealer Desk broker) does not send your trading order on to be matched with an order from another trader. Instead, your DD broker will also be your counterpart in the transaction. The DD broker is thus a market maker or pass you on to their market maker, while ECN brokers and STP brokers are not. Using a DD broker have certain advantages, but also creates a conflict of interest since your broker is also your counterpart in each trade. 

The ECN broker consolidates price quotations from several market participants and can usually offer a tighter bid/ask spread than other securities brokers. Instead of making money on the spread, the typical ECN broker will make most of its revenue from charging a commission on each trade you do.

ECN brokers are popular among traders that seek transparency and deep liquidity, and are willing to pay commissions to get this.

Other reasons to opt for an ECN broker: 

  • Trading outside traditional trading hours
  • Avoiding the conflict of interest inherent in the DD broker model (this aspect is linked to the transparency mentioned above). ECN brokers will pass your order to liquidity providers, not to a market maker. 
  • A higher level of anonymity. This aspect is typically important for investors doing larger transactions, and of lower importance for the standard small-scale retail investor.  
  • ECN brokers typically provide their clients with a certain amount of price history. 

 

Why not use an ECN boker?

– Do not use an ECN broker unless it makes sense for you to pay the price for using an ECN broker. For certain types of trading, it is simply not worth it. Always look at all the fees and commissions, and how they would be applied to your trading, before you make a decision about which broker to use. 

 

STP fx brokers 

Unlike Dealer Desk brokers (DD brokers), STP brokers are not market makers. The STP broker will send your order on to the market where it can be matched with an order from another trader. A DD broker on the other hand will be your counterpart in each transaction, which have its advantages but also creates a conflict of interest. 

STP is short for Straight-Through Processing. Straight-Through Processing is an automated process carried out through electronic transfers. There is no manual intervention. STP is used in several different fields, including payment processing and securities trading. 

The STP broker will typically use an electronic communication network (ECN) and is then technically also an ECN broker. An STP broker must have the necessary system and technical network access in order to make straight-through processing happen. Systems for straight-through processing of trading orders began to develop in the 1970s, with the raise of the Automated Clearing Houses (ACH networks). 

It should be noted that even though STP typically involves no manual interference, automated safety guards can be included in the infrastructure to flag or stop orders or transactions that are deemed suspicious because they fulfil certain criteria, and such alters will notify human security specialists.  

Both ECN broker and STP brokers are NDD brokers, where NDD stands for Non-Dealing Desk. 

 

DD fx brokers 

A dealing desk broker (DD broker) will not provide you with unfiltered access to the market. If you are a forex dealer, this means that you will to be given unfiltered access to interbank rates. While a Non Dealer-Desk broker (NDD broker) will pass your order to numerous market liquidity providers, the DD broker will not. 

The DD broker is also known as a market maker (MM), since the broker will be your counterpart in each transaction. Your orders will not be matched with orders from other traders. This creates a conflict of interest, since your broker is also your counterpart. 

DD brokers usually publish rates and prices that are similar, but not necessarily identical, to the interbank market rates.  

Why pick a DD broker over a NDD broker? 

  • NDD brokers will expose you to the exact spread on the interbank market, and sometimes DD brokers offer tighter spreads than this.
  • NDD brokers typically charge a higher commission on each trade than the DD broker, although always check this in advance because this is not always true. NDD brokers pass the spread directly through to the client and tend to make the bulk of their revenue from charging commissions. The DD broker will instead make the bulk of their revenue from the bid/ask spread. 
  • Some DD brokers offer quicker trades. You are trading directly with your broker, instead of waiting for your order to be matched with an order from another trader.

 

Why not pick a DD broker over a NDD broker?

  • When your broker is also your counterpart in a trade, there is a built in conflict of interest. There are reputable DD brokers out there who takes this very seriously and have routines in place to make sure they do not take advantage of the power imbalance. Unfortunately, there are also DD brokers that take advantage by offering prices that are comparatively far from the actual market price in a way that is detrimental to the clients. (Remember, in forex trading, every little pip can make a difference.)

 

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