dealing desk or no dealing desk (trader broker vs broker)

 In choosing a forex broker, find out what you want.


 When you visit a restaurant, don't you look at the menu before making a decision to order?


 Even if you are a regular customer of the restaurant, it would be nice to check the menus provided.


 In general, forex brokers are grouped into two:


 Dealing Desks (DD) and


 No Dealing Desk (NDD)


 Dealing Desk brokers are also called market makers.


 No Dealing Desk or Brokers can be further divided into:


 Straight Through Processing (STP) , and


 Electronic Communication Network + Straight Through Processing (ECN + STP).


What is a Dealing Desk Broker?


 Forex brokers operating as “traders” make money through spreads and provide liquidity to clients.  This type of broker is also called a "market maker".


 BrokerDD creates a marketplace for their clients, meaning they often take the opposite side of the Client's transactions.


 You may think that there will be conflict later, but it really isn't.


 Brokers will still give the option to sell or buy, but they do not care about the choice of the last order from the Customer.


 Since market makers control the price once orders are filled, there is relatively little risk with FIXED spreads (more on that later).


 Dealing desk broker customers do not see real prices from the interbank market.  But don't be afraid.  Competition between brokers is very tight so that the interest rates offered by brokers are far from inter-bank rates.


 The following is the transaction scheme of the Dealing Desk broker:


Say you place a buy order for EUR/USD for 100,000 units.


 To meet your needs, the broker will try to find suitable sell orders from other clients, or transfer your transactions to their liquidity providers, which are larger entities that can buy and sell financial assets at any time.


 With this, the risk will be less because they profit from the spread without taking the opposite side of the Customer's transaction


 However, if there are no matching orders, then the broker will open the opposite order to yours.  This method is used to minimize risk and still get profit.


 Remember!  Every forex broker has a different risk management policy, so be sure to know this before working with a broker.


 What is a No Dealing Desk broker?


 As the name suggests, No Dealing Desk (NDD) brokers are pure Broker types.


 NDD brokers will not take counter trade orders.  The NDD broker only serves as a liaison


NDDs are like building bridges: they build a structure to connect two areas over difficult terrain.


 NDDs can charge a very small commission when trading or simply add a mark-up by increasing the spread slightly.


 No Dealing Desk brokers can be STP or STP + ECN.


 What is an STP broker?


 Some brokers may claim that they are true ECN brokers, but in reality this broker only has a Straight Through Processing system.


 Forex brokers that have an STP system transfer customer orders directly to liquidity providers, in this case are banks that have access to the interbank market.


 NDD STP brokers usually have multiple liquidity providers, quoting their own bid and ask prices.


 Let's say this NDD STP broker has three different liquidity providers.  Below you can see three different pairs of bid and ask on the system.

BIDASK
Liquidity Provider A1.29981.3001
Liquidity Provider B1.29991.3001
Liquidity Provider C1.30001.3002
The system will then sort this bid price and ask price from best to worst.  In this case, the best price on the bid side is 1.3000 (Customers sell high) and the best price on the ask side is 1.3001 (Customers buy low).  Bid/ask now 1.3000/1.3001.


 Will this quote be visible on the platform?


 Of course not!

 The broker will add a small markup which is usually fixed to compensate for the work they do.  If their policy is to add a 1-pip markup, the offer that will be visible on your platform is 1.2999/1.3002.

 A 1-pip spread turns into a 3-pip spread.


 When the Customer decides to buy 100,000 units of EUR/USD at 1.3002, the Customer's order will be transferred to the Liquidity Provider.

 If the Customer's order is approved, the Liquidity Provider will make a short-position of 100,000 units of EUR/USD 1.3001, and the Customer will make a long-position of 100,000 units of EUR/USD at 1.3002.  The broker will earn 1 pip.

 Changing bid/ask quotes are the reason most STP brokers have variable spreads.  If the spread widens, the broker has no choice but to widen their spread as well.

 Some STP brokers offer fixed spreads, others offer VARIABLE spreads.

 What is an ECN broker?


 ECN brokers actually allow their Customers to interact with their partners such as: banks, retail traders, hedge funds, and even other brokers and partners.  In essence the participants trade with each other by offering the best bid/ask price.

 ECN brokers also show "Depth of Market."

 Depth of Market allows clients to view buy or sell orders from other traders.  With this the Customer can open orders opposite to other traders for profit.  ECN brokers usually charge a small COMMISSION fee per lot of transactions.

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