Finding the right Forex broker to trade with will never be an easy feat. Going through all the brokers available in the market seems like a daunting task.
To help you in your decision-making process, let’s talk about the types of Forex brokers in the market.
TWO KINDS OF FOREX BROKERS
Electronic Communications Network (ECNs)
An ECN broker is an alternative trading system which digitally links market participants in order to buy or sell currencies, stocks, and other financial instruments with one another. ECNs flash orders through a consolidated quote system which the public can view. Such entities rule out tapping a third party to facilitate transactions aside from helping investors make immediate and automatic transactions beyond trading hours.
A market maker displays buy and sell rates for a guaranteed number of shares in a move to go neck in neck for customer order flows. To stay in the game, MMs must keep both bid and ask prices within a predetermined spread. Specifically, a market surfaces when the designated market maker sets the bidding price and offers through time to make sure there are ample buyers and sellers for every marker order. They act as catalysts in the secondary market for beefing up liquidity and, subsequently, long-term growth in the market
FOUR SPIN-OFFS OF ECN AND MM
You have probably heard about Non-Dealing Desk (NDD), Direct Market Access (DMA), Dealing Desk (DD) and Straight-Through Processing (STP).
A dealing desk broker provides an avenue for easy access to the interbank market, a market for trading currencies. This is a place for currency dealers at a bank or financial institution to do business. Banks and financial firms also have DDs in order to facilitate trades in securities and other financial instruments outside the currency market. It is typical to have a bunch of DDs across the globe.
Direct Market Access
DMA is an electronic trading venue allowing investors to utilize financial instruments and order books of an exchange which processes securities transactions on a regular basis. Sell-side entities usually offer this type of market that requires using an intricate technology. Although trades are swiftly acted upon, an intermediary brokerage company handles the transaction. In the 1990s, brokerage firms have shifted to using DMA instead of market making quote for trade processing.
NDD states that if no dealing desk system is available, positions are immediately offset and then sent to the interbank. Unlike DDs, NDDs have variable spreads and that liquidity providers set the price. In simplest words, NDDs, either an STP or ECN, re a mere bridge between two parties as brokers do not transmit their clients’ orders via DDs.
STP is a process embarked by financial firms to boost the processing time of any transaction without any human involvement. The use of STP dated back as early as the 1990s.
Also read: 3 Most Successful Forex Traders