Tag: Dealing Desk

Categories
Forex Course

38. Two Types of ‘No Dealing Desk’ Brokers

Introduction

Introduction

Introduction

In the previous lesson, we have discussed the two major classifications of forex brokers – Dealing Desk and No Dealing Desk. In this lesson, we will dig a little deeper and understand the types of No Dealing Desk brokers.

No Dealing Desk brokers can be classified into two types:

  • ECN brokers
  • STP brokers

What is an ECN broker?

An ECN broker is a forex broker expert that uses electronic communication networks to provide clients with direct access to other participants in the exchange market. Also, since these brokers consolidate prices from several other market participants, they usually offer their clients tighter bid/ask spreads. However, this tight spread is compensated by a small fixed commission charged by the brokers.

ECN brokers are NDD brokers, who do not pass the clients’ orders to market movers. Instead, they find participants in a trade electronically and then pass the orders to liquidity providers.

Understanding ECNs

As the name suggests, ECNs provide a network for buyers and sellers to participate and execute trades in the market electronically. These brokers make this possible by providing access to information on the orders being entered by the participants, and by facilitating the execution of these orders.

This network is designed to match the Buy and Sell orders currently traded in the exchange. And when the price requested by the client is not available, it provides the highest bid and lowest ask in the market.

What is an STP broker?

STP brokers, or Straight Through Processing brokers, are the ones who pass the clients’ orders directly to their liquidity providers. As discussed, the liquidity providers include banks, hedge funds, investment banks, etc. In this system, no intermediary or such will be involved in the execution of the order. Hence, the unavailability of the Dealing Desk makes the broker’s electronic trading platform Straight Through Processing (STP).

Moreover, with the absence of an intermediary (Dealing Desk), the brokers will be able to process orders of the clients much faster and without any delays.

Looking it the other way, STP brokers benefit from having many liquidity providers, because an increase in the number of liquidity providers increases the chances of the orders being filled for their clients.

Additionally, each time a client places a trade through an STP platform, the STP broker will make a profit. As STP brokers do not take the opposite of the clients’ trade, they add a minimal extra spread when quoting a bid/ask rate. And this small markup to the spread is passed to the clients via its electronic platform.

This completes the lesson on different types of No Dealing Desk brokers. Take the quiz below to know if you have got the concepts right.

[wp_quiz id=”54414″]
Categories
Forex Course

37. Types Of Brokers in the Foreign Exchange Market

Introduction

Introduction

Introduction

If you can recall, we have discussed a bit about Forex brokers in course 1.0. Here is the link for that article. There we have discussed the brief history and introduction to brokers. We recommend you to have a quick look at that article to get a better understanding of Forex brokers. In this article, let’s discuss the two different types of brokers.

Forex brokers can be mainly be classified into two types:

  • Dealing Desks (DD)
  • No Dealing Desks (NDD)

What is a Dealing Desk broker?

Dealing Desk brokers are the Forex brokers who make money through spreads. Also, they are the ones who provide liquidity to the clients. Hence, these brokers are also referred to as Market Makers. The specialty of these brokers is that they can literally make the market for their clients. This is because they usually take the other side of the clients’ trade. So does this mean that brokers take every price the client requests? Well, that’s not the case. They set both sell or buy quote, which is offered to the clients.

While trading with Dealing Desk brokers, the clients cannot see the real interbank market rates. However, as there is always stiff competition between brokers, the rates provided by the Dealing Desk brokers are close or sometimes the same as the interbank rates. Hence, the exchange rates are not a matter of concern.

Working of Dealing Desk brokers

Comprehending the working of Dealing Desk brokers is quite simple. Let’s say that a trader wants to buy one standard lot (100,000 units) of USD/CAD with a Dealing Desk broker. Once the request for a buy is sent to the brokers, the following are the scenarios that take place.

Firstly, to fill the order, the broker will try to match the order with their other clients who are willing to sell at that price. If they do not find any sell order, they route the trade to its liquidity providers, a sizeable entity who is always on the go to buy or sell a financial asset.

However, still, if there are no matching orders, they end up taking the opposite of the trader’s trade.

What is a No Dealing Desk broker?

As the name pretty much suggests, these are the set of brokers who do pass their clients’ orders through a Dealing Desk. Meaning, they do not take the opposite trade of their clients. To put it in simple words, No Dealing Desk brokers act like bridge builders. They simply link two different trading parties.

Since these brokers connect the clients directly through the Interbank Market (Banks, Hedge Funds, Mutual Funds, etc.) they usually charge some commission from the clients, or they slightly increase the spreads.

This completes the lesson on types of brokers. And in the next lesson, we shall do a comparison between these two brokers to give you an idea of which broker one must choose. Don’t forget to take the quiz below before you go.

[wp_quiz id=”53810″]
Categories
Forex Market

What Should You Know About Forex Brokers?

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction

In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The majority of these foreign exchange transactions are done by major financial institutions and global organizations. But where do the retail traders like you and I undertake Forex trading? We do it through independent companies called brokers. In this article, let’s understand what a Forex broker is and the different types of Forex brokers existing in the market.

What is a Forex broker?

In the Forex market, buyers and sellers can be thousands of miles apart. So there needs to be a mechanism that matches their interest. This is where a Forex broker comes into the picture. A Forex broker is a platform where the buyers and sellers get to buy and sell currencies. It acts as a middleman between a trader and the market. In simple words, to find a buyer or seller for a particular currency, the broker matches your order with the respective buyer or seller. These brokers are also known as ‘liquidity providers.’

Types of Forex brokers

Even though all brokers in the Forex industry provide the same basic service, there is a difference in their functionality and mechanism. The first thing to look for with every Forex broker is whether they have a ‘dealing desk’ or not. In brokerage firms, the dealing desk refers to a team of traders who manage the broker’s inventory and hedging operations. Nowadays, most of the dealing desks consist of hundreds of traders and analysts.

Brokers that work on dealing desk operate in a closed environment wherein they set their own price rates. They fill their client orders by matching the buy and sell orders of their clients. When a broker uses a dealing desk, they are called as Market Makers.

Brokers that don’t use a dealing desk get rates from the interbank market and process their client orders by linking them directly to institutions, hedge funds, mutual funds, and other brokers. When a broker does not use a dealing desk, they are either known as ECN (Electronic Communication broker) or an STP (Straight Through Processing) broker.

Market Makers

Market Makers (MM) are called ‘dealers’ in the interbank market. They charge a variable spread instead of commission, which is why most of the time, they are accused of manipulating the spread and prices of the currency pairs. Theoretically, the spread should widen or narrow during high liquidity conditions, but MM brokers offer a fixed spread and compete based on the spread.

Electronic Communications Network (ECN) Broker

ECN brokers make their profits from spreads they charge on buy and sell rates or from fixed trade commission. The transactions here are mostly interbank. Because the spreads in the interbank markets are dynamic, ECN brokers prefer charging commissions rather than fixed spreads. This is one of the easiest ways to trade, but this requires a much higher investment capital as clients in the interbank markets only trade large lots. Therefore, trading with ECN brokers requires a minimum account balance of $1000. In addition, there is no guarantee that you will find a buyer or seller in the interbank market at your quoted price. ECN brokers sometimes won’t be able to execute orders at that price, so they issue a re-quote or simply reject the order. These are some of the limitations of ECN brokers.

Straight Through Processing (STP) brokers

Like ECN brokers, STP brokers, too, don’t have a dealing desk. But they use some of the practices of Market Maker brokers to provide flexibility to their clients. They display rates similar to the interbank market rates, and their first priority is to process trades directly in the interbank market, like an ECN broker. If the counterparty is not found, they start acting like a Market maker and match the order with their own client. The initial capital required to trade with this type of broker is relatively lesser compared to ECN brokers.

These are the different types of brokers in the market. So when you are choosing a broker, make sure to select the one that suits your trading style and capital available to trade.

Trading Platforms 

The ‘Market Makers’ provide trading platforms like Act Trader and MetaTrader since their orders are executed at the dealing desk. However, non-dealing desk type of brokers uses direct access trading platforms. They display prices directly from different liquidity providers. The platforms which are best suited for this requirement include Currenex Viking software and Level II software. The trading platform should be chosen in such a way that it suits your trading objectives. We hope this article helped you in deciding that. Let us know if you have any questions in the comments below. Cheers!