Brief classification of brokers in the FOREX market
Brief classification of brokers in the FOREX market:
DD-Broker – the so-called Dealing Desk – a broker in the Forex market works by issuing their own orders and maintain fixed spreads. Dealing Desk-broker earns on spreads and trading against svoihklientov. This is called market participant a market maker. In fact, it describes its activities: market maker “makes the market» (make the market) for bidders – when traders want to sell any financial instrument, he buys them; when traders want to buy, he sells. Thus, the market maker is always ready to become a counterparty to their clients – to put a counter-order and make a deal. In Russia, such DD-brokers are also called dealing centers.
When working through a dealing desk traders do not see the market prices, which allows market makers to manipulate appointed quotes when they need it.
Forex market maker – a market-maker, earning on the difference in the spread, as well as loss-making transactions of customers, because Market Makers trade against their clients, speaking a second (opposite) side of the transactions.
In the case of trade through the Dealing Desk-broker you need to know that the counterparty is a market maker who is able to monitor the actions of any client. In the worst case scenario, market makers can “share” all customer groups. For example, in one group of customers may be less successful, and the processing of orders placed in the auto-execute. In most cases, these clients suffer losses, and the dealer, respectively, profits. In the other group may be customers with indicators of profitability higher, and then their orders will be monitored more carefully, slowly, possible frequent rekvouting. In periods of high volatility of customer orders in this group will be executed in the second place, while the dealer will try to reduce their own risks. Thus, the operation and integrity Dealing Desk-broker depends on the internal regulations of the company.
NDD (No Dealing Desk) – a broker that provides customers access to the interbank market without obrabatyvaniya orders by market makers on the dealing desk. Using this system helps to avoid rekvoutinga (delay in the confirmation of orders). In fact, it allows traders to trade without restrictions.
NDD-broker for profit can either establish a commission for transactions, or increase the spread and then allow clients to trade without commission.
NDD can be of two types: STP or ECN + STP
STP (Straight Through Processing). STP-brokers send orders directly from clients to the liquidity providers – international banks. STP-brokers may be as a supplier and several. The greater the number of banks involved in the process, and, accordingly, the greater the liquidity, the better for the customers.
The main essence of the STP-platform – access to the real market traders and the market price, plus the possibility of immediate order execution without dealer intervention.
At STP-broker has the choice of either a fixed or floating spreads. As mentioned above, STP-brokers organize trade through international banks. They are intermediaries between their clients and banks, receive quotes (and spread, respectively) that are declared in the interbank market. According to statistics, most banks offer fixed spreads and are themselves market makers. Next STP-broker can choose one of the options:
1. Leave fixed spreads.
2. Reset the specified fixed spread and let the system select the best prices the bid (buy) and ask (sell), which offer participating banks (and the more of them the better). Such spreads are called floating.
How did STP-brokers earn profit?
Since they (as well as ECN-brokers) do not trade against their clients, they make a small “premium” to a spread (spread markups). This can be done by adding a certain number of “pips» (pips, usually 1-2 points) to the best bid price and by deducting the same amount of points from the best price the ask, the proposed liquidity providers. All orders of customers come to banks of the quotes, which they initially announced, and the difference in the spread STP-broker takes himself.
ECN (Electronic Communications Network) – system in the FOREX market, which allows the bidders to trade directly with each other. ECN-Broker provides a platform where all market participants (banks, market makers and individual traders) interact with each other, exposing in competitive bids for the purchase and sale. Thus, at each time a trader can execute your order at the best price existing in the system. All trading orders are reduced between counterparties in real time.
Using this system always involves a small fee for transactions – a commission.
Sometimes STP-brokers call themselves ECN-brokers. But to be a true ECN-broker, he must show the “depth of the market» (Depth of the Market – DOM) using a market “cups”, which allows the customer to see their own orders, their size and position relative to other orders, as well as It allows participants to see all active orders of other customers.
Thus, when trading via the ECN traders can determine the liquidity of the market and make educated trading decisions.
ECN-brokers always have floating spreads. In this case, once they establish a commission for transactions on the FOREX market. The Commission – the only income that is received ECN-broker does not earn on the difference in spreads.
The advantages of trading through brokers NDD
The main reasons due to which traders choose NDD-brokers are transparency and anonymity of trade, better and faster execution.
a sign of transparency means that the trader is playing in the real market, not artificially created for him. Best prices – the result of competing bids for the purchase and sale.
Anonymity means that all orders of customers are executed automatically, immediately and anonymously, as opposed to the scheme Dealing Desk, where orders can be executed only after confirmation from the dealer.
In summary, it can be noted that the ECN-brokers earn less than the rest of the dealers working in the FOREX market. They receive only a commission, rather than the profit from the difference in the spread. Thus, they are interested in the benefit of their customers, otherwise they will not even commission.
STP-brokers earn on spreads. That is, even without a dealing desk schemes, they can set their own prices (through the “spread-allowance”). But earning a spread, STP-brokers send trade orders directly from clients to the liquidity providers, providing its customers with a convenient and modern system for trade, establish the reduced amount of the initial deposit, guarantee fast order execution and trading anonymity. STP – brokers are also interested in customer winnings to continue to earn on spreads.
Market makers earn spreads and customers occupy opposite positions. However, if the client becomes too profitable (and therefore, unprofitable for the company), it may “upset» DD-broker. While professional and has a high reputation for the market-maker could afford such a client, a smaller dealer may close the customer access to its site.
FOREX – brokers are not too bad in general, whether Dealing or Non-Dealing Desk. they usually do not trade against any trader rather try to work not only in the field of cooperation with customers, but also to themselves, thus keeping your business. Many large brokers who have thousands of customers, try to help them become successful traders. But as soon as the trading order is placed, every man for himself.
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