1 Dealing Desk And Market Maker
DD/MM Dealing Desk Brokers ( or Market Maker):
Route orders through Dealing Desks
“Make the market” and trade against clients by Hedging. (They take the opposite side of the trade(When traders want to sell, they buy from them, when traders want to buy, they sell to them)
Losing trades of clients are counter-traded and become brokers’ profit. Winning trades of clients are processed to offset broker risks.
Fixed spreads
Makes money through spreads and when a client loses a trade.
Price Manipulation is possible. Traders can’t see the real market quotes.
Transparency of dealing desk brokers differ depending on their own company rules.
2 NDD – No Dealing Desk STP/DMA/ECN Forex Brokers
provide access to the interbank market without dealing desk.
No dealing desk(No market making), all orders are passed to Liquidity Providers(LP) directly.
Forex brokers that have no dealing desk can all be called ‘STP’brokers.
no re-quotes and no additional pausing when confirming orders.
makes money by commission or spreads
Benefits of No Dealing Desk brokers
Anonymity. Clients’ orders are executed automatically, immediately and anonymously. There is no dealing desk watching you orders.
Better&Faster fills. Because all Participants or liquidity providers compete for prices in a real market.
Transparency.
2.1 Liquidity providers (LPs)
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.
Prices are determined by LP(s)
LPs compete for providing the best bid/ask rates for orders from brokers.
More LPs usually means more depth in the liquidty pool,thus better prices for traders.
Some so-called ‘STP’ brokers have only one LP, so there will be no price competition, their role in fact are just middleman or IB (Introduing Broker). LP control the price(spread).
Regular STP Brokers has a small predetermined number of liquidity providers.
ECN brokers have a large number of liquidity providers.
Brokers with variable spreads give clients the best current spreads they can get. They always choose the best bid & ask price from different LPs.( DMA/STP Brokers will also add a small mark-up to make profit themselves. ECN Brokers charge commission)
2.2 STP Forex Brokers – Straight Through Processing
List of STP brokers http://forextrading100.com/stp/
STP
Straight-through processing enables the trade process to be conducted electronically without manual intervention.
STP Forex Brokers don’t trade against clients
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.
Provide access to the real-time market quotes
Those STP Brokers that have fixed spreads won’t 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.
2.3 DMA/STP Forex Brokers- Direct Market Access
List of DMA/STP brokers:http://forextrading100.com/dma/
Forex DMA refers to electronic facilities that match orders from traders with bank market maker prices. It enables buy-side traders to trade in a transparent, low latency environment.
Traders are offered direct access to the market. All orders are passed to LPs directly
Trader can place orders with liquidity providers(foreign exchange banks, other brokers, market makers etc).
Only Market execution. STP brokers that offer Market execution provide true Direct Market Access (DMA)
Market execution is more transparent. Orders go to the market,and are filled based on available quotes from LPs.(DMA/STP brokers will add a small mark-up in order to make profit)
Instant execution is less transparent. Orders don’t go to the market. They are instantly filled by the broker, who then may (or may not) offset own risks with LPs. Regular STP 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 client’s dealing price and/or charge a commission.
Only variable spreads
Only 5 digit pricing
optional feature: DOM access (depth of the market book access)
ECN brokers always offer DMA, but not all STP brokers offer DMA
DMA/STP Benefit
Anonymous platforms ensure neutral prices reflecting global FX market conditions.
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
Welcome all trading style
2.4 Regular STP vs DMA/STP
DMA/STP brokers have more liquidity providers thus better prices for clients.
DMA/STP brokers always offer variable spreads,some regular STP brokers offer fixed spreads
DMA order execution is always Market execution;
There are no re-quotes with the DMA model
DMA model allow all trading style:scalping,news trading, swing trading,position trading etc.
2.5 ECN/STP Forex Brokers- Electronic Communications Network
List of ECN/STP Forex brokers: http://forextrading100.com/ecn/ List of Metatrader ECN Forex brokers: http://forextrading100.com/mt4-ecn/
ECN Brokers
ECN/STP 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.
Allow clients’ orders to interact with each other.
Orders are matched between counter parties in real time.
Participants get the best offers for their trades available at the time.
Only variable spreads
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
Anonymous trading environment.
Straight through processing with banks liquidity.
All trading styles are welcome
Interbanks prices and spreads. Greater number of marketplace participants means tighter spreads.
Greater price transparency, faster processing, increased liquidity.
2.6 DMA/STP vs ECN
Trading Cost. ECN brokers make profit through commission. DMA brokers make profit by adding small mark-ups on the best prices the get from LPs. Prices of DMA model is quite competitive because ECN technology solutions come at a cost.
ECN is the most transparent model. ECN Forex broker provides a marketplace where all its participants trade against each other real time.
Both offer only variable spreads;
Both have fractional pricing;
Both have DOM (Depth of the Market) orders book.DMA/STP Brokers usually don’t show it to you.
2.7 Hybrid Model
Some 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) can’t be sent to the liquidity providers, because they don’t 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 it’s liquidity providers with STP Model.
3 Conclusion
Dealing desk brokers or Market makers make money on spreads and when clients lose trades. They won’t necessarily manipulate the price,but when you lose a trade, they’d be very ‘happy’. Since there will always be more losing traders than winning traders, their business will always be profitable.
Dealing desk brokers are able to profile their clients. Some dealing desk brokers divide clients into groups. Orders of less successful clients are executed automatically because on average they will lose. Clients who are likely to be successful might experience re-quotes,slippage,and slower execution during certain times.
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 ,DMA, STP, or market maker,it’s important to trade with the broker that has a good reputation.
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