When trading forex online, you will need a forex broker who provides you with a trading platform that enables you to place and manage trades on the forex market. With so many forex brokers to choose from, it can seem like an overwhelming decision at first. Here we will look at the different types of forex brokers so that you can narrow down your search.
Types of forex brokers
Dealing desk forex broker
A dealing desk (DD) forex broker is also known as a market maker. Market makers provide their own spreads and may decide to quote above or below the real market rates at any time they choose. They may offer fixed or variable spreads but will these spreads will most likely be higher than those available from a non-dealing desk brokerage.
These brokers do not use liquidity providers (LP’s) as they are counterparty for traders who buy and sell forex currency pairs. These brokers get compensated through the spreads and/or by taking the opposite side of the trade. It is often considered that there will be a conflict of interest between the trader and broker when there is dealing desk interference between them. Thus, this is not my preferred choice of forex broker.
Non-dealing desk forex broker
A non-dealing desk (NDD) forex broker offers traders direct market access (DMA) without any interference. These types of forex broker may use an STP or STP+ECN execution model. NDD brokers will usually have tighter spreads as they can come direct from the interbank market. Some NDD brokers will also add a spread mark-up and charge a small commission fee for each trading position to cover their costs.
Straight through processing forex broker
The straight through processing (STP) broker allows total computerization of trade transactions and instant processing direct to the interbank market without requiring verification from the broker.
Electronic communication network forex broker
Electronic communication network (ECN) brokers offer and display order book data instantly. They will often show bid/ask prices offered by liquidity providers such as global banks in the interbank market. ECN brokers are considered more transparent and can deliver the tightest spreads available from their liquidity pools. ECN brokers will usually charge a commission for trades as they are not marking up spreads. They process all transactions directly on the interbank market without a dealing desk and therefore, there is no conflict of interest between broker and trader.
Multilateral trading facilities forex broker
An MTF broker brings buyers and traders of forex together in an exchange platform under non-discretionary rules. The exchanges used by these brokers are not regulated, but the manner of operation is similar to a regulated exchange. MTF offer transparent trading rules and a fair-trading structure while at the same time providing efficiency of the pricing structure and the clearance of transactions.
Types of forex brokers conclusion
Hopefully you now have a clear understanding on the different types of forex brokers and the execution models that they use. You can then consider which option is more suited to your trading style and preferences. I personally always prefer to use an ECN forex broker as I find that they tend to have the tightest spreads long with reliable execution so that I get my order placed at the best possible prices and can save in trading costs over the long term.
You may also refer to my forex broker reviews for some inspiration and see my best forex brokers page for those that I consider to be amongst the industry leaders.