Home Forex Brokers The Hidden Truths About Dealing Desk and ECN Brokers

The Hidden Truths About Dealing Desk and ECN Brokers

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Forex traders have always expressed their concerns in respect of choosing the right broker that would exude stability and trust. In terms of broker types, traders are generally offered two options: Dealing Desks (DD), which are also called Market Makers, and No Dealing Desks (NDD) that consist of two subgroups – Straight Through Processing (STP) and Electronic Communication Network + Straight Through Processing (ECN+STP). Most often the question of selection is narrowed down to Dealing Desk and ECN brokers, which both have their own groups of avid supporters. Today, we are going to compare and contrast the two kinds of brokers and look into the matters that seem to be causing all the commotion.

Dealing Desk Brokers

The first group – Dealing Desk brokers – is known for making money through spreads as well as the liquidity that they provide their clients with. The other name of this type of brokers that we mentioned above is quite descriptive of their ability as they can literally create a market for their clients by taking the other side of their trades. Many traders immediately assume that this approach is questionable in terms of conflict of interest, when in fact the reality is somewhat different. What DD brokers actually do is offer sell and buy quotes, thus filling both types of client orders. They, hence, have no connection to the individuals in their making of trading decisions. Despite being the broker of choice for the majority of forex traders, DD brokers are usually under great scrutiny due to traders’ fear stemming from these brokers taking the opposite side of the trade and knowing the spreads in advance. 

ECN Brokers

As an NDD broker, the second group discussed today – the ECN brokers – do not pass client orders through a Dealing Desk. What they do allow is for the client orders to interact with other participants’ (such as banks, retail traders, hedge funds, or other brokers) orders in the ECN. These interactions enable these participants to offer their best bid and ask prices and, therefore, trade against one another. In addition, clients relying on ECN brokers will have the option of seeing the Depth of Market or the buy and sell orders of other market participants. Unlike DD brokers, this type of brokers earns their compensations in the form of a small commission. ECN brokers are also recognized for their smaller spreads and are generally perceived differently from DD brokers owing to their inherent differences. 

While from the realistic point of view, some characteristics and past events revolving around the two may truly invoke some feelings of discomfort, buy traders often take matters too much to heart thinking that brokers aim at destroying traders. This, however, could not be farther from the truth especially because brokers are only interested in having a sufficient number of participants in the market that can provide them with money. Brokers, be them DD or ECN, will generally go at great lengths to ensure that traders stay in the game because without traders there would, naturally, be no brokers. Therefore, those statements often uttered by traders such as Dealing Desk brokers are always against you while ECN brokers always support you are quite superficial and do not reflect the state of the matter. Many traits and services of the two brokers are taken for granted and assessed from too emotional a standpoint, without allowing for a more objective analysis. No broker is invested in seeing traders as individuals, let alone putting effort into sabotaging their traders, which does call for an intervention to stop spreading myths. 

Profits from Spreads

Brokers will generally make money from the spreads, where DD brokers will earn by taking the other side of the trade and ECN by charging the commission. Therefore, both of them equally see benefits from the spreads themselves, yet they have a different approach to demanding compensation for what they do. It is important to note that brokers will never prevent traders from earning more, like what you can see in casinos for example, because the list of participants is simply too vast and there will always be traders who will keep losing and putting money directly in brokers’ pockets. Still, as discussed before, brokers are not aimed at sabotaging traders, secretly wishing that they lose, as this goes against their own needs and goals. Like with insurance companies, brokers need traders to keep making money.

Aside from the major concern regarding DD brokers taking the opposite side, the question of safety in connection with ECN brokers is equally present and shared among traders in the forex market. Quite understandably, the most pressing concern involves the fear of a potential crash that could take ECN brokers out of business along with traders’ money. After what happened with FXCM (Forex Capital Markets) during the EUR/CHF crash, safety became an even more important requirement besides ease of use and customer service. Many of the brokers were impacted by the currency pair crash of 2015 due to the fact they did not have an added hedge that taking the other side of the trade provides to DD brokers. Naturally, the panic spread to other traders who were not trading the pair in question, especially because the loss of money directly affected other brokers’ solvency and this left an impression of insecurity and instability among everyone in the market.

Matters of Security

The topic of security of one’s finances is legitimate, but the overall consequences of the above-mentioned crash have at times been blown out of proportions. The event later proved to have concealed many facts and that the crash resulted from the choice that had been made before. The scandal came to prominence after CFTC, a US regulatory body stepped in and demanded that FXCM exit the US market. Nonetheless, these brokers were left intact because they worked with thousands of traders who in return were granted safety for the same reason. Despite the mistake they had made in the past, the company was bought off right away. And, most importantly, what traders often fail to grasp nowadays is that FXCM did not truly lose traders’ money, but the money was already lost by traders themselves, which further proves how all the concerns over the possibility of a crash causing brokers’ instability illogical and overblown.

Aside from the issues presented in the paragraphs above, the main question of today falls right down to the selection of spreads. All traders are understandably keen on finding better, lower spreads nowadays and, as explained before, ECN brokers are well-known for their narrow spreads. Nevertheless, with the competition rising by the day, spreads have become more or less equal in this respect regardless of the broker one opts for. The differences are simply too small to make a trader go for one broker rather than for the other. Also, even if a trader looks at sites where they can see real-time spreads (e.g. on MyFxBook), the numbers change quite rapidly and, within one hour or so, traders will be presented with a different spread of winners and losers.

These differences, however, further lose their importance if you are someone trading the daily chart where these matters are simply not relevant as with other trading styles. The varieties one can spot between different spreads should not be of concern for any trader regardless of how they trade (e.g. whether it is a five-minute or daily chart) because, at the end of the day, these will not matter after a year passes. At times it may be a wiser decision to trade a portion of a pip for convenience or quality of life. The end result will not depend on the spread itself but on other, more important factors that make someone a good trader overall.

The Role of Each Trader

Forex traders have the option of testing each piece of information nowadays, which is an important item of knowledge especially when emotion-fueled stories start to circulate. Traders have an obligation to assess everything and prevent the myths from factoring in their decision-making processes. We can see how news is mostly blown out of proportions and, especially with communities gathered around the same topic or goal, clarity and vision can get rather obscure. As every main brokerage house can proudly offer smaller spreads, traders need not concern themselves with matters that do not impact their trades. Therefore, the debate over which broker to use, the DD or the ECN one, now becomes futile.

Aim to maintain a sense of objectivity and stop making matters too personal. Dealing Desk brokers will always take the opposite side of a trade and it does not pose a threat to any individual trader. ECN brokers, likewise, should not be judged for a past mistake that is highly unlikely to ever be repeated. Simply put, your broker has no interest in bringing you down and, as long as there are interested parties, they will do whatever it takes to keep the game going. Last, instead of weighing yourself down by unnecessary questions and concerns, you truly need to go and see what is offered in the market and test it yourself before allowing panic to affect your trading.

 

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