Forex Brokers – Traders Performance Advantage
Author: Matt Miller, FxST Certified Trader
When first looking at what type of broker you should choose we must first understand the different definitions of brokers and what is actually happening when you place your order.
There are 3 main terms that you will want to be aware of when choosing a Forex broker.
- Dealing Desk
- Straight Through Processing
- Electronic Community Networks
These defining terms basically determine how your order is executed when you place a trade in this large electronic marketplace. Now lets go a little bit further and actually take a look at what each of those terms actually mean!
Dealing Desk (DD) – A Dealing desk is what brokers use to fill the gap between the larger institutional traders and smaller retail traders. They are routing your order to their own trading desk, where they will take the opposing side of the position while bundling orders and passing them off to larger institutions in much larger volume. There are two ways that brokers can make money off of the trader. Generally, the broker makes their money through a fixed spread. The brokers dealing desk, aka “Market Makers” can also make money by taking the opposing side of your trade before passing it through to larger pools of liquidity. Generally speaking, dealing desks can easily be manipulated, giving the retail trader a disadvantage.
Straight Through Processing (STP) – Brokers that use STP essentially receive your order and pass it through to other large institutions or liquidity providers. These liquidity providers could be anything from banks, hedge funds and/or any other large financial institutions. The more institutions a STP broker works with will directly affect the amount of liquidity you as the trader, are able to access ( obviously the more the better). Brokers that offer STP may either offer fixed spreads or variable spreads, and the markup in the spread is how they make their money. Usually a broker that deals with more tier-one institutions or prime brokers are able to offer better spreads to its clients.
Electronic Community Networks (ECN) – An ECN is the most efficient way to facilitate trades. This advanced technology allows traders to trade directly with competing traders without any intervention. The spread is variable and is not adjusted or marked up by the broker. Generally a small commission is payed for the service of facilitating your trade. Generally speaking one must have a decent size account (10K+) to trade on a true ECN platform. Brokers that offer ECN order execution generally favor short term traders or scalpers. As they are not concerned with your ability to profit because they are not taking the opposing side of your trade. They simply care about making their commission that is usually quoted per million traded, so it is in their best interest to keep you in the game.
Watch the videos below as Chief Trader Armando Martinez analyzes different ECN platforms in one of our Live Training Events.