If you are into forex trading or researching and studying, for now, you may have already encountered the terms broker, market makers, and the like. These people are the representatives of buyers and sellers in forex trading transactions. They are like intermediaries. We can classify brokers into types. One is a dealing desk broker, and the other is a no dealing desk broker. This article will discuss the second one: the no dealing desk broker and its corresponding types.
Who is Mr. No dealing desk, forex broker?
Now that you know who Mr. Dealing desk broker is, it is time to meet Mr. No Dealing Desk forex broker. As his name suggests, their clients’ orders do not go through a dealing desk. They do not take the other client’s trading side but link the two parties involved. They will either ask for a minimal commission or put a small markup spread. Two classifications fall under the bracket of the no dealing desk brokers. We have STP and STP + ECN brokers. Let us know more about them and who they are.
Who are STP brokers?
An STP broker is short for a straight-through processing broker. These forex brokers will pass their client’s orders to liquidity providers who can access the interbank market. Interbank sits in the highest position in the forex trading structure hierarchy. Their liquidity providers are usually more than one, and every single one of them has their bid and ask prices.
If your forex broker has four liquidity providers, then there will be four sets of bid and ask quotes. The NDD STP broker’s system will arrange these quotes from the worst to the best. They usually place a minimal and fixed markup price depending on their policy.
For example, after the system sorted the worst to best, the best bid price shows 1.2000, and the best ask price is 1.2001. The bid-ask price is 1.200/ 1.2001. Rizalina wants to buy 50,000 units of EUR/ USD at 1.2002. The forex broker will then forward her buy order to a liquidity provider A and B. Once the order gets acknowledged, the liquidity provider A or B will have a 50,000 EUR/ USD short position at 1.2001. The forex broker earns one pip in revenue while Riza has a 50,000 EUR/ USD long position at 1.2002. Now, we see why STP brokers usually have variable spreads. The bid and ask quote is not constant. As the liquidity provider’s spread widens, the forex broker’s spread also widens. Some brokers may offer a fixed spread, but they also have variable spread.
Who are ECN brokers?
ECN is short for an electronic communications network. ECN brokers enable client orders to interact with other ECN participating orders. And when we say ECN participants, we refer to banks, retailers, hedge funds, or even other brokers. In layman’s terms, these ECN participants trade with each other with their best bid-ask prices. ECN also enables these clients to access the depth of market where the other participant’s buy and sell orders are displayed. ECN brokers earn by charging commission instead of markups since ECN makes it hard to have a fixed markup.
As a summary
The no dealing desk forex brokers are our bridge makers in the world of forex trading. These brokers are further subdivided into two more categories which are STP or straight-through processing brokers and ECN + STP brokers or electronic communication network + straight-through processing brokers.
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