Best ECN Brokers
ECN Forex Brokers (No Dealing Desk + STP + DMA + ECN)
Forex Brokers: ECN vs STP vs NDD vs DD
DD — Dealing Desk — Forex brokers that operate (route orders) through the Dealing Desk and quote fixed spreads. A dealing desk broker makes money via spreads and by trading against its clients. A Dealing Desk Forex broker is called a Market Maker – they literally “make the market” for traders: when traders want to sell, they buy from them, when traders want to buy, they sell to them, e.g. they will always take the opposite side of the trade and in this way “create the market”. A trader doesn’t see the real market quotes, which allows Dealing Desk brokers (Market Makers) manipulate their quotes where they need to in order to fill clients orders.
NDD — No Dealing Desk — NDD Forex brokers provide access to the interbank market without passing orders trough the dealing desk. With true No Dealing Desk brokers, there are no re-quotes on orders and no additional pausing during order confirmation. This, in particular, allows trading during news times with no restrictions on trading.
An NDD broker can either charge commission for trading or choose to increase the spread and make Forex trading commission-free.
No Dealing Desk brokers are either STP or ECN+STP.
STP — Straight Through Processing — STP Forex brokers send orders directly from clients to the liquidity providers – banks or other brokers. Sometimes STP brokers have just one liquidity provider, other times several. The more there are liquidity providers and therefore liquidity in the system, the better the fills for the clients.
The fact that traders have access to real-time market quotes and can execute trades immediately without dealer intervention is what makes the platform STP.
ECN — Electronic Communications Network — ECN Forex brokers additionally allow clients’ orders to interact with other clients’ orders. ECN Forex broker provides a marketplace where all its participants (banks, market makers and individual traders) trade against each other by sending competing bids and offers into the system. Participants interact inside the system and get the best offers for their trades available at that time. All trading orders are matched between counterparties in real-time. A small trading fee – commission – is always applied.
Sometimes STP brokers are discussed as if they were ECN brokers. To be a true ECN, a broker must display the Depth of the Market (DOM) in a data window, let clients show their own order size in the system and allow other clients to hit those orders. With ECN broker traders can see where the liquidity is and execute trades.
Broker types and revenues: fixed vs variable spreads vs commission
ECN Forex brokers always have variable spreads. Only ECN brokers charge a commission for trading Forex. The commission is the only revenue/profit an ECN broker receives. ECN brokers are not making money on bid/ask (spread) difference.
An STP Forex broker is compensated through the spread (spread markups – to be explained in details below).
STP brokers have a choice of offering variable or fixed spreads. STP brokers route all trading orders to the liquidity providers – banks. These brokers, as intermediaries between their clients and banks, receive prices (spreads) posted by the banks on the Interbank market. Most banks, in fact, offer fixed spreads and are market makers.
An STP broker, therefore, has 2 options:
1. Let spreads be fixed.
2. Leave the spread at 0 and let the system take the best bid and ask from the number of banks (the more the better) and in this way provide variable spreads.
How an STP broker earns its money? Since STP brokers (as well as ECN) don’t trade against their clients, they add their own small markups to the spread quote. This is done by adding a pip (or half a pip, or any other amount) to the best bid and subtracting a pip at the best ask of its liquidity provider. All client orders are directly routed to the liquidity providers at the original spread quoted by those providers while an STP broker earns its money from its own markups.
Many STP brokers run a hybrid STP model: DD + NDD
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 a “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.
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 are 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 of 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 in 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.