More often than not, you check out their menu first to see what they have to offer. Forex brokers that operate through Dealing Desk DD brokers make money through spreads and providing liquidity to their clients.
Dealing Desk brokers literally create a market for their clients, meaning they often take the other side of a clients trade.
Issues with a Dealing Desk Broker
Market makers provide both a sell and buy quote, which means that they are filling both buy and sell orders of their clients; they are indifferent to the decisions of an individual trader. Since market makers control the prices at which orders are filled, it also follows that there is very little risk for them to set FIXED spreads you will understand why this is so much better later.
Also, clients of dealing desk brokers do not see the real interbank market rates.
The competition among brokers is so stiff that the rates offered by Dealing Desks brokers are close, if not the same, to the interbank rates. To fill you, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity provider, i.
By doing this, they minimize risk, as they earn from the spread without taking the opposite side of your trade. However, in the event that there are no matching orders, they will have to take the opposite side of your trade.
Take note that different forex brokers have different risk management policies, so make sure to check with your own broker regarding this. NDDs are like bridge builders: they build a structure over an otherwise impassable or hard-to-pass terrain to connect two areas.
No Dealing Desk Environment
NDDs can either charge a very small commission for trading or just put a markup by increasing the spread slightly. Some brokers claim that they are true ECN brokers, but in reality, they merely have a Straight Through Processing system.
Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market. NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.
In their system, they will see three different pairs of bid and ask quotes.
Their system then sorts these bid and ask quotes from best to worst. In this case, the best price in the bid side is 1. To compensate them for their trouble, your broker adds 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. You will see a 3-pip spread.
The 1-pip spread turns into a 3-pip spread for you. Your broker will earn 1 pip in revenue. If the spreads of their liquidity providers widen, they have no choice but to widen their spreads too.
True ECN forex brokers, on the other hand, allow the orders of their clients to interact with the orders of other participants in the ECN. Participants could 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.
Depth of Market displays where the buy and sell orders of other market participants are.
Types of Forex Brokers: Dealing Desk Vs No Dealing Desk - Currency Online Trading
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