Most traders often get confused between the types of forex brokers. At the outset, we have Market Markers, ECN and STP forex brokers which form the Dealing Desk v/s Non Dealing Desk type of brokers. To the layman, these terms might seem confusing, perhaps greek and latin as well. In this article, we explain the difference between an ECN and STP forex brokers. Before we continue further, let us first understand the forex broker dealer types, primarily the Dealing Desk v/s Non Dealing Desk brokers.
Market Makers, also known as Dealing Desk forex brokers act as a counter party to your trades. In other words, when you trade forex with a market maker, you are in effect trading forex against the Market Maker’s traders. The term dealing desk is derived from the fact that there is someone on the other end of the trade who takes counter positions against your trades. When dealing with market makers or dealing desk brokers, there are two possible outcomes. When you win a trade, the dealer loses, and vice versa. There are lots of rumours and speculations that dealing desk brokers tend to manipulate the prices, however this cannot be confirmed in its entirity. However, there is one fact that when you trade forex with a market maker, you will not be able to trade during market events as the price volatility puts the market maker at risk. Further more, Market makers offer fixed spreads. The market maker makes their profits from the difference in spreads and trading against their traders.
ECN and STP forex brokers are also know as Non Dealing desk forex brokers. In other words, there are no dealing desk which mean when you place a trade, it is processed straight through. A No Dealing Desk broker simply passes on your trades thus processing traders straight through to the interbank markets. True No Dealing Desk forex brokers do not have any requotes. Which means that when you place your trade, it is processed that very instant. Another feature of ECN/STP or non dealing desk brokers is that they offer variable spreads, sometimes 0 spreads as well.
No Dealing desk brokers make their profits by charging a commission for the trade you place. It is well known that the forex ECN model is actually the purest form of trading the forex. It is with no dealing desk brokers that the terms ECN and STP can get confusing.
What is Straight Through Processing
An STP forex broker passes your traders directly to their liquidity providers, made up of banks, financial institutions as well as other traders on their network. An STP broker can have just one liquidity provider or as many as they want to. The more liquidity providers a forex broker has, the higher the chances of your trades getting filled. With an STP forex broker, you get access to real time market quotes with no interventions.
What is an Electronic Communication Network
When trading with an ECN forex broker, your trades can interfact with other client’s orders. In other words, an ECN forex broker provides a marketplace where clients ranging from individual traders to banks and financial institutions can trade against each other. The trades placed are matched between the counter parties in real time. Just as with STP brokers, ECN forex brokers also make their money by charging a commission or fee for the trades that are made. An ECN forex broker is one that displays the depth of the market and clients can see their own order size. In short when trading with an ECN forex broker, traders can see where there is more liquidity and place trades accordingly. Read this article to understand Electronic Communication Network better.
Commissions, Spreads – ECN and STP Forex brokers
ECN Forex broker model is commission driven. They do not charge any other overheads, such as the difference in spreads.
An STP forex broker model is based on the spread markup. This spread mark up can usually be around half or up to one pip usually.
An STP broker usually offers different types of accounts where traders can choose for a Dealing Desk or a No Dealing Desk account. Forex trading accounts such as mini and micro accounts where the trades are below 0.1 lots are usually routed through a dealing desk as they are small and cannot be accepted by STP. So if you make use of a mini or micro forex trading account, you are infact trading against the broker, which in this case becomes the market maker.
Why is no dealing desk better for traders
No dealing desk brokers offer higher level of transparency but at the same time require a higher level of investment. Trading with an ECN or STP forex broker is ideal for intermediate traders who can manage to invest substantial amount of capital. If you are a beginner or just started trading forex, opting for a forex market maker is a better option as you can learn your way by making use of micro or mini accounts, which are ideal as the investment is low and at the same times allows for a good learning curve. After gaining substantial trading experience, upgrading to an ECN forex broker would be the most logical move.
Preferred No Dealing Desk Broker: LMAX Exchange