Choosing a forex broker could be a challenging task that requires you first to figure out what type of broker you want to trade with. Besides the trading platforms, trading tools, and risk management tools provided by forex brokers, you also need to take into account the type of execution model, meaning the method in which your forex broker executes your forex trades in your live trading account. For that matter, there are different types of forex brokers that can be divided into dealing desk and no dealing desk forex brokers and each one has its own pros and cons.
So, with that in mind, let’s get started and see which type of forex broker is best for you.
Dealing Desk brokers, also called Market Makers, are a type of broker that takes the opposite side of their client’s trades, by fixing the bid and ask price and waiting for a trader who would place an order with their setup. Essentially, dealing desk forex brokers profit by buying at lower prices and selling at higher prices, and by taking advantage of the spreads between the bid and ask price.
In most cases, dealing desk brokers keep your order in-house, within their own liquidity pools and do not execute it to the real forex market. This means that dealing desk execution is mostly based on the trust you have in your market maker broker. Usually, dealing desk brokers offer you the ability to use liquidity providers and have variable spreads, much like NDD forex brokers.
Let’s consider that you placed a buy order for EUR/USD for 1 Lot with your Dealing Desk forex broker.
To fill your order, your forex dealing desk broker will first try to find a matching sell order from its other retail traders’ clients or pass your trades on to its external liquidity providers in the interbank market (other financial institutes, banks, etc). By doing this, they minimize their risk, as they earn from the spread without taking the opposite side of your trade.
In case that there are no matching counter orders, they will take the opposite side of your trade.
As the name signifies, No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk. Instead, NDD forex brokers send the buy and sell orders directly to the forex market (via liquidity providers, banks, other brokers, etc).
Think of No Dealing Desk Brokers as bridge builders. They match two opposite trades placed by two market participants and make a bridge to join them.
The prices you see at your forex trading platform are live quotes from global banks which means that with an NDD broker, the price you have when you click is the final price for your position.
Keeping the above in mind, No Dealing Desk brokers can be two types, STP or ECN.
Forex brokers offering STP systems route the orders of their clients directly to their liquidity providers who have access to the real-time interbank market rates. These No Dealing Desk STP forex brokers usually work with a variety of liquidity providers, with each provider quoting their own bid and ask prices and executing their clients’ forex trades.
For example, let’s say your NDD STP broker has direct access to three different liquidity providers in the interbank market. That means that in their trading platform system, they will see three different quotes of bid and ask prices for each of the currency pairs as below.
From the example above, you can see that the best available bid price for EUR/USD is 1.1255 (selling high), and the best ask price for the same pair is also 1.1254 (buying low). This is the main benefit when you trade forex with an STP broker – you get the best price available in the Foreign Exchange market.
Pretty awesome, right?
Now, do you think that is the quote you would get?