Types of Forex Brokers
There are different types of forex brokers. Knowing these different types of forex brokers is the key to choose the right forex broker for you. Because you don't want to deal with certain types of brokers. The choice of forex broker may also determine your profit and loss, and also determine your style of transactions. Broadly speaking, the broker can be divided into two categories: Dealing Desk (DD) and Non Dealing Desk (NDD).
These brokers often referred to as MARKET MAKERS. If you enter into a trade with a dealing desk broker, they often will be your direct counterparty and take the other side of your trade. How can it be?
Let’s say you place a buy order for EUR/USD for 100,000 units with your Dealing Desk broker. The broker will first try to find a matching sell order from its other clients. By doing this, they minimize risk, as they earn from the spread without taking the opposite side of your trade.
However, in the event that there are no matching orders, they will have to take the opposite side of your trade. Any gain on your trades will be a loss to them and vice versa. When the customer wins, then the profit is paid from the broker's own cash.
The risk is when there are too many customers win, then brokers go bankrupt, and the profit can not be paid to the customer. This case rarely happens. But, take note that different forex brokers have different risk management policies.
I suggest you should avoid this type of brokers. If you have to, use a legal, registered, and good reputation dealing desk broker, to avoid the risk of default.
NON DEALING DESK
As the name suggests, these type of brokers DO NOT take the other side of their clients. They simply link the clients to liquidity provider, which is comprised of financial institutions like banks, mutual funds, hedge funds, etc.
Non dealing desk brokers pass the quotes in the interbank market, add an a few fractional pips to the spread or charge a very small commission their compensation.
No Dealing Desk brokers can either be STP or STP+ECN.
What is STP broker?
Forex brokers that have an STP (Straight Through Processing) system route the orders of their clients directly to their liquidity providers who have access to the interbank market. NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.
What is STP+ECN Broker?
Some STP brokers will also allow your orders to interact with other orders within an Electronic Trading Network (ECN). This allows you to not only see the best price offered at the moment but the buy and sell orders of other ECN participants. You can better assess the depth of the market with this information. ECN brokers tend to charge commissions instead of spreads.