Before engaging in any transactions that would involve intermediaries in a market with no central marketplace such as that of the Foreign Exchange Market, the traders need to first start by choosing a broker per their trade needs. This has been brought forth by the development of online brokerage which created an online front for currency exchange transactions, while others still opt for the more traditional brokerage which uses a dealing desk.
The two types of Forex brokers are the Dealing Desk and the No Dealing Desk. Forex brokers that use a dealing desk (Market Markers) in their operations are based in closed environments where they can set their own price rates and also fill in all the orders they have from their clients. On the other side of the divide, are the brokers that don’t have a dealing desk who get their price quotes mostly from the interbank market and their orders linked directly to their liquidity providers such as other brokers, hedge funds and banks.
The Main Forex Broker Groups
No Dealing Desk
This type of Forex Broker, as the name suggests, doesn’t have a dealing desk. Here, the best composite quotes are gotten from other multiple Forex quote dealers that would give such a broker their liquidity in the market. The clients thus do not pass through the trading desk as their main role is to link the two parties (buyer and seller) together. These type of brokers act like a bridge that connects the trader to the buyers by offering a trading platform for the traders. Additionally, money here is earned by the brokers from the commission that they charge, or by putting a markup through the spread increase process.
The No Desk Forex Brokers can either use the Straight Through Processing (STP) system or the Economic Communications Network (ECN). The STP brokers are known to route their orders that they have directly to the specific liquidity providers that they are dealing with in their bid to get a connection to the interbank market frontier. The ECN Forex brokers usually don’t have a trading desk and use the electronic trading platform where market-makers located in banks, traders and other participants in the trade can place bids through their system. In the ECN system clients can see the “Depth of Market” which shows where the specific buy and sell orders of other participants is located.
The Dealing Desk Forex Broker(Market Markers)
Forex brokers in this brokerage type also make their money from the spreads they push and the liquidity that they provide to their clients. The objective of the market markers is to acquire part of the spread that they would use to trade in the market on both sides (bid side or offer side) and avoid accumulated risks with any other counterparty that may be involved. The advantage of using Forex brokers from this divide is the market that is created for the clients together with the risk management policies that are implemented to avoid loses.
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