Dealing Desk brokers, also called Market Makers, are a type of broker that takes the opposite side of their client’s trades, by fixing the bid and ask price and waiting for a trader who would place an order with their setup.
Dealing desk brokers profit by buying at lower prices and selling at higher prices, and by taking advantage of the spreads between the bid and ask price.
In most cases, dealing desk brokers keep your order in-house, within their own liquidity pools and do not execute it to the real market.
Let’s consider that you placed a buy order for EUR/USD for 1 Lot with your Dealing Desk broker.
To fill your order, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity providers (other financial institutes, banks etc). By doing this, they minimise their risk, as they earn from the spread without taking the opposite side of your trade.
In case that there are no matching counter orders, they will take the opposite side of your trade.
As the name signifies, No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk. Instead, they send the orders directly to market (liquidity providers, banks, other brokers etc).
Think of No Dealing Desk Brokers as bridge builders.
They match two opposite trades placed by two different traders and make a bridge to join them.
The prices you see at your trading platform are live quotes from global banks which means that the price you have when you click is the final price for your position.
No Dealing Desk brokers can be two types, STP or ECN.
Forex brokers offering STP systems route the orders of their clients directly to their liquidity providers who have access to the real-time interbank market.
No Dealing Desk STP brokers usually work with a variety of liquidity providers, with each provider quoting their own bid and ask prices.
For example, let’s say your NDD STP broker has three different liquidity providers. That means that in their system, they will see three different quotes of bid and ask prices for each of the currency pairs as below.
Liquidity Provider A: Currency Pair: EUR/USD, Bid Price: 1.1250, Ask Price: 1.1254
Liquidity Provider B: Currency Pair: EUR/USD, Bid Price: 1.1253, Ask Price: 1.1256
Liquidity Provider C: Currency Pair: EUR/USD, Bid Price: 1.1255, Ask Price: 1.1257
That means that the best available bid price for EUR/USD is 1.1255 (selling high) and best ask price for the same pair is also 1.1254 (buying low).
Pretty awesome, right?
Now, do you think that is the quote you would get?
Your broker isn’t running a charity!
Do you think that means that your broker went through all that trouble of sorting through those quotes for free?
To compensate them for their efforts, your broker will add a small, usually fixed, markup. If their policy is to add a 1-pip markup, the quote you will see on your platform would be 1.1254/1.1255
So when you decide to buy 100,000 units of EUR/USD at 1.1255, your order is sent through your broker and then routed to either Liquidity Provider A or B.
If your order is filled, the chosen Liquidity Provide will have a short position of 100,000 units of EUR/USD 1.1254, and you will have a long position of 100,000 units of EUR/USD at 1.1255. Your broker will earn 1 pip in revenue.
An ECN (Electronic Communication Network) broker provides its traders with direct access to other participants in currency markets.
The participants can be banks, retail traders, hedge funds, and even other brokers. In essence, participants trade against each other by offering their best bid and ask prices.
ECN brokers make money by charging a small commission on each position. This trading model ensures you that there is no conflict of interest, as they get their commission whether you make or lose money.
It is its transparency and access to real-life information that makes it appealing to most traders.
That’s completely and utterly up to you!
One type of broker is not better than the other in all conditions.
It is your choice to decide whether you would like to have a tighter spread or you are comfortable in paying a commission on a variable spread per trade.
Usually, day traders and scalpers prefer the tighter spreads because it is easier to take small profits as the market needs less ground to cover to get over transaction costs. And they choose a dealing desk broker.
Meanwhile, wider spreads tend to be insignificant to longer term swing or position traders, and that’s why they often choose No Dealing Desk Brokers.
At the end of the day, choosing the right brokers comes down to your trading style and the type of trader you are.
So no pressure.
In fact, maybe we can help. Keep reading on.