There are two basic types of Forex brokers you can deal with. Dealing Desk (DD), also is called Market Maker (MM) and No Dealing Desk (NDD). Unlike the other financial markets brokers that only give you an access to the market, Forex brokers often are the market themselves. Now let’s look at the definition of the broker according to Wikipedia.
- A broker is an individual or party (brokerage firm) that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed.
- A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument held in inventory, hoping to make a profit on the bid-offer spread, or turn.
What that really makes it complicated is a Forex broker can be either a broker or a market maker or even both!
Market Maker is a firm that buys from your lots and sells to you. Your orders are never quoted on the market because the broker is the market itself. You might heard from them the term “WE NEVER TRADE AGAINST YOU!” Well, this is a marketing thing. They don’t need to trade against you but they have an interest for you to lose your money.Market Makers often take the other side of your trade, as they first try to match your order with another customer, but will be the other side of the trade if necessary.
Forex Broker, which is not a Market Maker, is either a Straight Through Processing Broker (STP) or an Electronic Communications Network Broker (ECN). These types of brokers are called No Dealing Desk brokers.
ECN Broker is a broker who gives you a direct access to display your order in the market. Their income comes from spread displayed to you. For example, if the current actual spread on a certain currency pairs is 0.2 pips, this broker will display you let’s say 0.6 pips and make 0.3 pips as a profit on every trade you make.
STP Broker is a type of a Market Making broker. This broker, most of the time, displays its own quotes (which are correlated to the actual inter-banking quotes). What makes it really confusing is that STP brokers sometimes routes your order to the real market but sometime doesn’t and acts like a Market Maker. They can route successful traders’ trade to the real market while losing clients will not be routed to the real market. This way they make profit twice. 1. By client’s losses; 2. By not loosing money to successful traders. There will be commission arbitrage too, in case they route your order through another broker or the inter-bank market. For example, if you trade at 2 pips with this broker, it routes your order to another inter-bank market or broker and makes 1 pip easy money.
So, how to distinguish between MM, STP or ECN?