4 Different Types of Forex Brokers and How They Execute Your Trades

When you’re searching for a reliable Forex broker to open an account with, you might have noticed that there are different broker types. Most likely, you would have seen the terms: STP, ECN, NDD, etc. This might be confusing to most traders but it’s important to know the different types of Forex brokers because they execute your trades in different ways. In this article, we’ll explain the four main types of brokers: Straight Through Processing (STP), No Dealing Desk (NDD), Market Makers or Dealing Desk (DD), and Electronic Communication Network (ECN).

However before we begin, let’s look at the difference between fixed and variable spreads which relates to this topic.

• Fixed spreads remain the same during all market conditions. Usually brokers offer fixed spreads of about 2 or 3 pips for major currency pairs. The main advantage of fixed spreads is that even during volatile markets, the spreads will not increase and will remain constant.

• Variable spreads are always fluctuating. Usually brokers try to offer the best bid and ask quotes they can find for that moment. So variable spreads can drop as low as 0.1 pips for major currency pairs. During high liquidity and low market activity, the spread tends to be lower. During volatile market conditions, however, it can significantly widen.

Now let’s look at the four types of Forex brokers:

Straight Through Processing (STP)

STP brokers have no dealing desks and pass their clients’ orders immediately to liquidity providers on the interbank market. These liquidity providers, or third parties, are the counterparty to the client’s trade. STP brokers offer low variable spreads and are less likely to have re-quotes during news releases. There are also no delays in processing the orders. STP brokers earn their money from the spread and some might charge their clients commissions.

No Dealing Desk (NDD)

NDD brokers can also include STP, ECN or STP + ECN brokers. As the name implies, they do not have a dealing desk, and their clients’ orders are passed directly to liquidity providers for execution without any intervention from a dealer. The NDD broker offers low variable spreads and fast execution. NDD brokers also earn their money from a small markup on the spread or may charge commissions.

Market Makers or Dealing Desk (DD)

Market makers can also be referred to as Dealing Desk (DD) Brokers. These types of brokers have a dealing desk and act as a counterparty to their clients’ traders. This means that the broker takes the opposite side of every trade their clients make. Some people think there is a conflict of interest since the broker is the counterparty for every trade their client makes. Yet because they accept all bid and ask quotes, the broker has to find a counterpart among its other clients. If it’s not possible to find it there, then they can choose to pass the order to a liquidity provider. Market makers usually have quotes which are slightly different from those of the liquidity providers on the interbank market. Also, they are known to offer fixed spreads.

Electronic Communication Network (ECN)

ECN brokers have straight-through-processing execution. They pass their clients’ orders to the interbank market for execution but, in addition, they allow their clients to be a counterparty to a transaction. ECN brokers usually have a trading module/system, whereby all the orders from banks, market makers and individual traders are shown, and compete against each other. This is the most transparent system of delivering price quotes. The spreads are variable and are very low. ECN brokers make money from the spread and can charge commissions on trades. Also, most of the time, they require a high initial deposit in order to open an ECN account with a broker.

Hopefully, you now have a better understanding of how Forex brokers work and how they execute your trades. It’s also useful to know that many Forex brokers allow their clients to choose how they want their trades executed by opening a specific account type. For example, a Forex broker can offer ECN, STP, and NDD live accounts, which means that with the one broker you can choose which execution type you want and then open a live account for it.

This post was provided by LiteForex, a leading Forex and CFD broker.