Forex brokers: ECN vs STP vs NDD vs DD
DD - Dealing Desk - Forex brokers that operate through the dealing desk and assign prices fixed spreads.DD broker makes money via spreads and trading against clients. DD Forex brokers are called market makers - they literally "make the market" for traders: when traders want to sell, they buy from them, when traders want to buy, they sell them, that is, they always stick to the opposite side of the transaction, and such way "to create a market." The trader does not see the real market quotes, which allows brokers Dealing Desk (market makers) to manipulate their quotes when they need to fill customer orders.
NDD - No Dealing Desk - NDD Forex brokers provide access to the interbank market without passing orders through a dealing desk. With this NDD no additional quotes on orders and no unnecessary pauses during the order confirmation. It allows you to trade during the news without restrictions on trade.
NDD broker can either charge a commission for trading or choose to cancel the increase in the spread and commission trade Forex.
NDD brokers are either STP, or ECN + STP.
STP - Straight Through Processing - STP Forex brokers send orders directly from clients to the liquidity providers - banks or other brokers. Sometimes STP brokers have just one liquidity provider, in others - a few.The greater the liquidity providers, and consequently, the liquidity in the system, the better fullness for customers.
The fact that traders have access to quotes on the market in real time and can make trades immediately without dealer intervention, called STP.
ECN - Electronic Communications Network - ECN Forex brokers additionally allow client orders to interact with other client orders. ECN Forex broker provides a marketplace where all its participants (banks, market makers and individual traders) trade with each other by sending competing demand and supply in the system. Participants interact inside the system and get the best offers for their trades available at that time.All trading orders are matched between counterparties in real time. The Commission is always applied.
Sometimes STP brokers are discussed as if they were ECN brokers. To be a true ECN, a broker must display the depth of the market (DOM) in the data window, to let customers show their own order size in the system and allow other customers to see these orders. With ECN broker traders can see where there is liquidity and make transactions.
Types of brokers and revenues: fixed vs floating spreads spreads vs commission
ECN Forex brokers always have floating spreads. Only ECN Brokers take commission for trading in the market Forex. The Commission is the only revenue / profit, which ECN broker receives. ECN brokers do not make money on the difference in the purchase / sale.
STP Forex broker is compensated through spreads.
At STP brokers have the option to offer floating or fixed spreads. STP brokers send trade orders all liquidity providers - banks. These brokers, as intermediaries between customers and banks, receive prices (spreads) posted by the banks in the interbank market. Most banks, in fact, offer fixed spreads and are market makers.
Therefore, STP broker has two options:
1. Fix spreads. 2. spreads set to 0, and let the system take the best offer and demand from several banks (the more the better), and thus to provide a floating spread.
How STP broker earns his money? Since STP brokers (as well as ECN) do not trade against their customers, they add their own small increments to quotations spreads. This is achieved by adding a point (or half a point, or any other amount) to the best deals and subtract points from the best provider of liquidity demand it. All customer orders are sent directly to the provider of liquidity to the original data spreads these vendors, while STP broker earns his money from his own margins.
Many brokers have launched hybrid model STP STP: DD + NDD
Each broker STP signed a business contract with its liquidity providers (prime brokers), where the terms of the contract regulate the minimum level of the transaction, which will be adopted by the liquidity provider. This means that all the small orders placed by traders (usually those that are below 0.1 lots) can not be sent to a liquidity provider, because they will not be accepted and therefore such orders must be processed STP broker, which in this then becomes the counterparty to your transactions (Dealing Desk model). If you are trading with accounts "Cents account" or "Mini-account", your broker is STP will likely always your counterparty transactions.
For all large orders (usually above 0.1 lots), STP broker uses their real technology STP bridge and sends the request to his supplier of liquidity. With each transaction, the broker receives a portion of the spread.
Forex Market Maker - DD broker makes money on the difference in the purchase / sale, as well as when the client loses, since market makers are trading against their clients on hedging - coming in the opposite direction.
Conclusion:
ECN Brokers pure breed among all dealers Forex. They do not have a profit on the difference in spreads.Their only income - commission. ECN Brokers interested in the customer wins, otherwise there is no commission to pay.
STP brokers make money on spreads, thus even if they have no physical dealing center to monitor and counter-trade against customer orders (except for the hybrid model STP), they can still set their own prices for managing trading orders to liquidity providers. They also provide their customers with additional services trade lower on account deposits, fast execution and anonymity of the terms of trade with the NDD. STP brokers are also interested that their clients were in the black, so that the broker can continue earning on spreads.
Market makers make money on spreads and hedging against their clients. However, if the client becomes "too" profitable, it can literally "upset" the broker. While this may be tolerable for a large and professionally reputable market maker, with a small dealer such client in the near future goodbye.
Advantages of trading with NDD brokers
Among the main reasons why traders are looking for NDD brokers is transparency, better and faster filling and anonymity.
Transparency means that a trader enters into a real market, not artificially created for him. The best filling are the result of the direct and competitive market bids and offers.
Anonymity means that no dealing center witness who has come to the market and filling out an application requesting, instead of client orders executed automatically through the network directly to the market and is completely anonymous.
On the opposite side is DD broker who is able to profile their customers. In the worst case, a broker can divide customers into groups and put less successful in the automatic execution and trade against them because on average they will lose. At the same time, customers who show signs of successful trading will be at the "slow" mode and they can be given the frequent re-quotes (requotes), slippage and / or slow implementation of operations, especially during fast movements in the market while the broker trying to compensate for their own risks. Transparency Dealing Desk broker depends on the rules in the company.
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