If you are interested in starting forex trading or CFDs trading, choosing the right broker is the first step. In this article, ZFX will explain to you the different types of forex brokers in detail, so you can choose the best one as you start trading forex.
There are two types of online forex trading platform:
- Dealing Desk (DD)
- No Dealing Desk (NDD)
DD Brokers: Dealing Desk Brokers (Market Makers)
Dealing Desk Brokers are also called Market Makers. As the name implies, a Market Maker creates a market for clients. Under certain conditions, when a trader wants to buy certain securities, the Market Maker will sell to the trader; and when the trader wants to sell, the Market Maker will buy from the trader. In other words, market makers will trade in the opposite direction to their clients when they need to.
By trading with DD Broker, the buy and sell price seen by the trader is not exactly the same as the actual price in the forex market. A market maker can control prices, for example by widening the spread and reducing its risk of completing a trader’s order. Some market makers may have fixed spreads to make it easier to manage risks.
In other words, market makers don’t have to trade in the opposite direction to their clients if necessary, because they can earn the bid-ask spread.
NDD Brokers: No Dealing Desk Brokers
No Dealing Desk Brokers do not act as counterparties to traders, instead, they will connect traders with Banks, inter-bank markets, liquidity providers, etc., so traders can trade directly at the level of the inter-bank forex market.
Individual traders are too small to participate in this level of trading. It is the NDD brokers who act as a bridge between clients and liquidity providers, so that individual traders can enjoy this direct trading experience in the interbank market. True NDD platforms will not require re-quotation and there is no further pausing during order confirmation, allowing investors to conduct real-time transactions without any restrictions.
No Dealing Desk Brokers can profit by charging a fixed commission or waiving commission but raising the spread.
The Business Model of Market Maker
DD brokers or Market Makers (MM) typically make profits from the spread, but most market makers make money when the trader loses money, as market makers are mostly traders’ counterparties who trade in the opposite direction to traders and hedge in the market only when needed. Therefore, on the whole, the profit model and logic of market makers are not so transparent.
Most market makers tend to categorize traders into groups that have a net loss in the long term and groups that have a net profit in the long term. For the loss-making category, the loss will become the market maker’s profit when they act as clients’ counterparties. For the profit-making category, the order is hedged into the forex market to be handled by the banks and other counterparties, and the market makers can only profit from the spread difference between the trader and the forex market.
Due to the conflict of interest between market makers and traders, the transparency of market makers is only determined by rules set within companies. So when it comes to choosing a market maker, traders need to pay close attention to whether the market maker is large, consistent, and reliable.
The Advantages of choosing an NDD Broker
Compared with DD brokers, many traders are prone to forex trading platforms without human involvement. In addition to the advantages mentioned above, it is also due to the fact that an NDD broker is more transparent on transactions, and the order execution is faster and fully anonymous. It means that the trading platform will not expose the identity of the trader, and all orders will be executed immediately and anonymously. In such a market, no one has the capacity to monitor orders, so as to ensure fairness.
ZFX is an NDD broker that provides a smooth and outstanding forex trading experience to our clients. Further, we subdivide NDD into STP and ECN accounts for the needs of different customers.
Find out more on the difference between STP and ECN accounts:
- The Best Trading Platform Award 2019 from Financial Weekly, Regulated by FSA.
- 100+ trading assets, including Forex, Stocks, Indices, Gold, Crude Oil, etc.
- 3 types of trading accounts to meet the needs of every customer
- 0 commission, low spread, leverage ratio up to 1:2000
- Powerful trading platform that executes 50,000 orders/s
- Open an account with a minimum deposit of $50
- 24-hour Customer Service
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.