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Every STP broker signs a business contract with its liquidity providers (prime brokers), where the contract terms regulate the minimum transactions level which will be accepted by the liquidity provider. This means that all small orders placed by traders (usually those which are below 0.1 lot) cannot be sent to the liquidity providers, because they won't be accepted; and therefore such orders should be handled by the STP broker, who in this case becomes a counter-party for your transaction (Dealing desk model). If you trade with "Cents account" or a "Mini account", your STP broker is most likely always is a counter-party of your trades.
For all larger orders (as a rule, above 0.1 lot), the STP broker uses its real STP technology bridge & sends orders to its liquidity provides. With each transaction, the broker receives a portion of the spread.
Forex market maker - a broker with a dealing desk earns money on bid/ask difference as well as when a client loses a trade, since market makers are trading against their clients by hedging - entering in an opposite trade.
Conclusion:
ECN brokers are the purest breed among all Forex dealers. They don't profit on spread difference. Their only profit comes from commission. ECN brokers are interested in their clients to be winning, otherwise there will be no commission to earn.
STP brokers make money on spreads, thus even though they do not have a physical dealing desk to monitor and counter-trade client orders (unless its a hybrid STP model), they are still able to set their own price - the spread markup - for routing trading orders to liquidity providers and providing their clients with advanced trading services, lower account deposits, faster execution and anonymous trading environment with no dealing desk. STP brokers are also interested to see their clients trading profitable, so that a broker can continue earning on spreads.
Market makers make money on spreads and by hedging against their clients. However, if a client becomes "too" profitable, it can directly "upset" the broker. While this may be tolerated and professionally managed by a larger reputable market maker, with a smaller dealer such client will be soon asked to leave.
Benefits of trading with No Dealing Desk brokers
Among the main reason why traders look for NDD brokers is transparency, better and faster fills and anonymity.
Transparency means that a trader enters a true market instead of the market being artificially created for him.
Better fills are a result of the direct and competitive market bids and offers.
Anonymity means that there is no Dealing Desk watching who has come to the market and is asking for an order to be filled, instead client orders are executed automatically, immediately through the market network and totally anonymously.
On the opposite side is a Dealing Desk broker, who is able to profile their clients. In the worst case scenario, such broker can split clients into groups and put less successful ones on auto-execution and trade against them because on average they will lose, while clients that show signs of successful trading will be put on "slow-down" mode and can be provided with frequent re-quotes, slippage and/or slower execution especially during fast moving markets while a broker tries to offset own risks. The transparency of a Dealing Desk broker depends on the rules inside the company.
Forex Brokers aren't bad on general, whether a Dealing or Non-Dealing Desk, they aren't there to be against any particular trader. They look to make business, not just work for traders in terms of cooperation in the market environment. Many large Forex brokers who have lots of clients tend to try to help their clients become profitable as much as they can, but once a trading order is placed, its everyone for themselves.
This is the first time I see a simple and clear information on DD, NDD, STP and ECN. I thought before that there are no differences between STP and ECN brokers. I even chatted with some brokers where they did not know about it (mostly those are DD brokers. Perhaps they claim that they do not know about it).
Thanks for your effort on this article
Best of luck
Aburenad
trader
December 17, 2008
This turned out to be a very helpful article. Thank you very much!
trader
December 17, 2008
Tradeview Forex and Thinkorswim are STP/ECN,
CHECK them out to confirm.
BrokerGuru
December 18, 2008
Thank you.
We've checked. It turned out that:
Tradeview Forex has a dealing desk: most of their risk is passed through to the banks, but they may take risks on smaller positions which banks wont accept.
Thinkorswim is an introducing broker for Penson Fincancial - a dealing desk broker which Thinkorswim routes their orders to.
trader
December 19, 2008
There has been some question as to MBTrading being an ecn? Anybody have any knowledge or experience? How can one verify the claims of a broker? Wouldn't they all claim to be stp or ndd since that is what it appears most forex traders are looking for?
tks
BrokerGuru
December 24, 2008
Alright, the results and answers are in:
We asked several ECN brokers to explain "How one can verify the claims of a broker being an STP/ECN."
MB Trading replied:
"MB Trading Futures maintains orders anonymously using STP/ECN technology. The technology itself is modeled after the securities industry and facilitates best execution for you and generates price competition, which means traders can "skip the middle man" and save money, rather then using other traditional FCM’s using deal desk models. The firm accomplishes this by routing orders to banks and pools of liquidity to create a true “non-dealing” desk platform. Traders have the ability to route orders via fifteen order types to qualified destinations through our STP (Straight Through Processing) platform.
Since there is no central marketplace for forex, there is no website/regulatory group similar to that of securities for you to verify. The only thing I can suggest is to perhaps try out our demo so you can experience the ECN technology yourself to see the differences between deal desk methodologies and our model."
Taurus Global Markets replied:
"On trader/client side there is no way of knowing whether a company is an ECN or NOT. There are also company's that may be ECN part-time, 50%, 90% or Full-time. We on this matter are full-time ECN, as we (support) are more technicians managing TradeFLO® that connects from MT4 to Banks, etc."
BrokerGuru
December 27, 2008
On top of everything said before, there are two simple rules to follow:
1. ECN brokers don't have fixed spreads, instead their spreads are variable. If a broker quotes fixed spreads - this is not an ECN broker.
2. ECN brokers charge commission for trading Forex. If a broker claims to charge no commission, it is not an ECN.
trader
January 2, 2009
what about GFT? Where do they belong? STP, NDD, market maker... etc The broker was not mentioned in your list
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