Understanding Orders Execution by Forex Brokers

Understanding Orders Execution bу Fоrеx Brоkеrѕ When it comes to types of Forex brokers, most sources you will find on the web will categorize them based on the following terms: dealing desk, market makers, no-dealing desk, straight through processing, electronic communication networks, direct market access, introducing, and you could probably find another term for describing basic broker type. Now the question is how to organize all these terms in a meaningful way.

The first thing you should understand is who organizes the market for you and who the counterparty of your trades is. Regarding this question two different types of FX brokers exist: so called dealing desk brokers (DD) and no-dealing desk brokers (NDD). DD brokers are your market, meaning, broker itself is the counterparty of your trades or to put it in another way, broker trades against you. Since DD brokers represent a market, they are also called market makers (MM). They profit from the spreads and also from the trades. They prefer traders who loose, unsuccessful traders, because they make brokers profitable. Wining traders on the other side force brokers to hedge on the interbank market, causing them additional cost so they are not among most wanted clients. Of course, reputable FX trading providers manage this professionally, while with some more ‘exotic’ brokers you may be asked to close the account and leave, if you will be too successful.

NDD brokers unlike DD brokers route your orders to ‘real’ market. When speaking about Forex, real market is a group of banks, funds, and other types of liquidity providers (LPs) – institutional intermediaries. The more LPs there are in the group, the better conditions for trading are established – higher liquidity, lower costs in terms of spreads. There are basically two types of NDD brokers: STP and ECN. STP stands for Straight Through Processing while ECN stands for Electronic Communications Network.

Let start with ECN first. This is a pool of LPs and once Forex broker joins the network, it gets connected to the market and can enjoy liquidity and other advantages of the whole network, without knowing and signing any agreement with any other member. Certain costs of joining and staying member of such network exist. When the client sends an order to ECN broker, it routs it further to the market and is filled from the LP who offers the best conditions/price. The counterparty of such trades can be anyone in the network. Because of many members clients can also enjoy the depth of the market (level 2) in their trading platforms. New trading, scalping and other special techniques are not a problem with ECN brokers.

STP brokers are similar to ECN, but instead of joining existing LP pools, broker has to sign an agreement with each LP separately. The more LPs it has signed an agreement with, the better for their clients. What has to be noted is the fact that not all STP brokers are the same. They differ about who is the counterparty of the trade you make. Some STP brokers provide direct market access (DMA), in which case your order is automatically routed to the market and any LP can be the counterparty – the one with best conditions. Some STP brokers on the other side trade against you (they fill your order) and then hedge in the real market of LPs to eliminate the risk.

So far we have clarified most of the terms about Forex broker execution types. The one we did not yet discussed is Introducing Broker (IB). This is nothing else than extended hand of existing broker, trying to bring in more business. You can find IBs for DD and NDD brokers.

Understanding Orders Execution bу Fоrеx Brоkеrѕ While some brokers clearly define themselves as one type of broker and build their marketing strategies on their advantages, it is sometimes difficult to say the exact type of order execution another Forex broker is offering. Well, there are certain facts upon which you can reveal type of broker, for example: ECN and DMA brokers will always provide variable spreads never fixed; ECN brokers charge trading commissions, while others mostly earn through widened spreads; level 2 quotes are only available with DMA and ECN brokers; etc. Many brokers also work on a hybrid model, providing for example DD execution on Micro and Mini accounts, while providing NDD solution on Standard accounts.

While DD brokers promote themselves ad no-cost brokers, you actually pay the wider spread as a fee and it is not necessary the cheapest solution for you. ECN brokers on the other side charge commissions for every trade, but they offer you raw spread without any markup. Heavier traders with higher volumes should consider trading with ECN brokers, while most of retail clients could do just fine with DD brokers. There are naturally other things to consider before choosing a broker. I recommend you to read some Forex Broker Reviews, Find Forex Brokers and Compare Forex Brokers before selecting one.