Broker Type

Choosing a Forex Broker
Before anyone starts investing, they must choose a brokerage in which to trade their money with. It is important to know the process in which the broker uses to provide their buy/sell prices. As well, fees and commissions vary from broker to broker, and the type of brokerage you deal with has a significant impact on these dealings. When trading forex, there are three main types of brokerages to deal with.

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1. Dealing Desks (DD)
• Known as Market Makers.

2. No Dealing Desks (NDD), which can be subdivided into:
• Straight Through Processing (STP)
• Electronic Communication Network + Strait Through Processing (ECN+STP)

3. Direct Market Access (DMA), which can be subdivided into:
• Direct Market Access + Strait Through Processing (DMA+STP)
• Direct Market Access + Electronic Communication Network (DMA+ECN)

Dealing Desks
First off, a dealing desk broker creates a market for their clients by taking the other side of a client’s trade. These brokers make money through the spread, thus creating market liquidity for their traders.

No Dealing Desks
These brokerages do not take the other side of a client’s trade, but rather link the two parties together. These brokers make their money from either a commission on every trade, or from a heightened spread.

STP Brokerages route their clients orders directly to the brokerages liquidity providers who have direct access to the interbank market. These brokers generally have many liquidity providers- each having their own bid and ask price. Brokerages who use this system find the best possible bid/ask price, but charge a small and usually fixed markup on the spread. While STP brokers do offer fixed spreads, most are variable spreads.

These brokerages allow their traders to see the full depth of the market by providing and allowing the interaction between other participants in the ECN (Electronic Communication Network). Usually these types of brokers are compensated through a small commission.

Direct Market Access

This type of broker allows the trader to deal directly with leading forex banks and market makers. Traders can benefit from trading this way due to the best possible prices in the market without having to use a dealing desk.

These brokers tend to have cheaper fees than DMA+STP brokers because there is no commission charged. Instead the broker marks up liquidity provider prices to make their money.

With these brokers, a client’s order is passed directly to the liquidity provider which allows traders to have their order fulfilled with the best possible price, with only a small mark up from the broker.

No matter which type of broker you choose, there are advantages and disadvantages to each. Ultimately it is up to the trader themselves to research and discover which one is best for them. It all depends on the investors trading style, financial goals and requirements, and whether they have access to the specified type of broker. One broker isn’t necessarily better than the other, it mainly depends on the style of fees and the type of trading being done. For instance, day traders and scalpers may prefer tighter spreads in which they prefer to pay a commission, while longer term traders will prefer to pay on wider spreads rather than on commission. Generally, when choosing a broker to deal with, it will be easy to understand which type to choose based off of the type of trading you will commence.