What type of broker is it?
This is an important feature of any decision making with regard to choosing a forex broker. You will see various types mentioned and it is a good idea to know exactly what you’re looking for. The following seeks to explain the main characteristics of each variant that you may come across:
Market Maker :- A market maker provides the pricing and liquidity through a dealing desk. Also known as a dealing-desk broker, they make money through the spread and through trading against their clients. Simply put, if a client buys EUR/USD they will sell EUR/USD. That is, market makers will always look to take the opposite side of the trade and will then decide whether to hold that position or offset it, to varying degrees, with other market participants in order to hedge their risk. For some traders, therein lies the problem. If the broker chooses to hold the position then they are in direct competition with the client – the client’s profit is the broker’s loss. There is a clear conflict of interest in this situation. Since the broker, in this instant, is quoting a price to you that is derived from the underlying market, it could be safe to assume that there is some profit for the broker built into this quoted price. However, the broker is taking on risk in order to assist in the filling of your order at a time when other brokers may not be willing to take on that risk and leave your order unfilled, or, filled at a price different to the one you requested. By creating increased liquidity the market-maker also makes outside market manipulation more difficult.
No Dealing Desk (NDD) :- A no dealing desk broker provides traders with access to the market without going through a dealing desk – as the name suggests. Since they do not take the opposite side of the trade their profit is not based upon the client losing, this can only be a positive thing for traders. Here, traders’ positions are automatically offset and transmitted directly to the liquidity provider. Generally speaking, the use of multiple liquidity providers will result in the best bid and offer price being displayed to the client and the fewest re-quotes since there are several places for the broker to offset the risk. A no dealing desk broker often comprises of a mix of an STP and an ECN.
Straight Through Processing (STP) :- STP brokers send orders directly from clients to the liquidity provider(s), dependent on the broker. Typically, the more liquidity providers there are, the better the fills for the clients. Here traders have access to the underlying market price and so there is no room for price manipulation. On top of this, traders’ orders are executed immediately, so the price you are quoted is the price you are filled at. This feature of no re-quotes is regarded as hugely important by many traders as it can be the difference between profit and loss.
Electronic Communications Network (ECN) :- An ECN broker is similar to an STP broker in that they have liquidity providers available to offset their clients’ orders. With an ECN broker, however, the broker is providing a market place for market makers, liquidity providers and traders to enter in competing bids and offers. So the ECN provides a form of betting exchange in which client’s orders, which are put through under the ECN broker’s name, can be opened against one liquidity broker with the position then closed against a second liquidity provider. The other scenario is where one client’s trade is filled against that of another, all in complete anonymity. Another characteristic of an ECN broker is that it will display the best available bid and offer price to clients while also showing the market depth – that is, the next available best price and the liquidity of it. This gives traders the ability to see where the money is weighted and can influence their decision. A greater number of participating traders in this market place leads to tighter spreads and fewer re-quotes, for this service ECN brokers charge a small fee.