As most things in this world there are several types of individuals, they can be physically different, they can have different points of view, they can be tall, short, fat or thin. Of course the forex brokers are not the exception of this rule. There are so far 4 types of forex brokers, the difference between them is the way they execute trade. The brokers also offer either fixed spreads or variable spreads.
On one hand fixed spreads tend to be of 2 or 3 pips, they do not change even in fluctuating markets and are usually offered for major currency pairs. On the other hand variable spreads can drop to 0.1 pips for major currency pairs and they tend to fluctuate, however its fluctuating condition depends on the market. When there is a low market activity but high liquidity the spreads are low but in volatile markets they tend to increase. Furthermore, this article’s main task is to explain how each of the 4 forex brokers’ types work:
1.Straight Through Processing or STP
This type of broker prefers to work with low variable spreads because there is no delay in processing the orders of clients. Why is that? Well because these brokers pass the client’s order to third parties on the interbank market, and these third parties are directly involved in the client’s trade. The money that these brokers earn comes straight from the spread and sometimes from the commission that some of the brokers charge to their clients.
2.Electronic Communication Network or ECN
This type of broker has a system in which competition is a must. Who are the competitors? you might ask, well the answer is the orders, all the orders from market makers, banks and individual traders compete to win the precious trophy. This system is leaded by variable spreads, which tend to be very low. ECN brokers as the STP broker pass their client’s order to the interbank market but the ECN broker client is also counterparty in a transaction. The money that these brokers earn also comes from the spread but the commission they charge depends on the trade. Usually to open an ECN account a juicy deposit is required.
3. No Dealing Desk or NDD
This type of broker has a combined system, which might include the participation of STP or ECN brokers and even in some cases both (STP brokers and ECN brokers). These brokers work with low variable spreads and they do not require the intervention of a third party, the orders pass directly to the liquidity providers. The money these brokers earn also comes from the spreads and sometimes they charge commissions.
4.Market Makers or Dealing Desk Brokers (DD)
These brokers can pass the orders to a liquidity provider and they can take the counterpart in their clients’ trades. These brokers quotes vary from those on the interbank market. DD brokers prefer to work with fixed spreads.
Take into account that Forex brokers usually offer their clients the possibility to choose how they want them to execute their trades, weather it is as an ECN, STP or as an NDD broker. You can have different types of trade execution in a single broker.
But also, do remember to make a good research about broker that you are going to trade with. No difference, Forex broker or binary options broker, it has to be reliable. We advise you to read FTrade review as an example of good research about broker.