Here are the types...
- Brokers with licenses (reputable)
- Brokers without a license (or without a reputation)
In general, there are Dealing Desk (DD) and NDD (No Dealing Desk):
- DD brokers
We normally consider DD brokers as market makers. The infamous term "market makers" is used because these FX company usually take the opposite of traders. They make money through spreads and cash.
They also try to find a similar long or short order at their other customers, before taking a counterparty exchange or passing it on to a liquidity provider. They are known to offer artificial quotes, and orders are executed on an optional basis.
- No Dealing Desk
Unlike DD, NDD uses STP and ECN technologies without a trading desk and route transaction orders directly to liquidity providers. This allows customers to access real markets with better and faster fillings.
It is a bridge between customers and cash providers, and there are no requotes when an order has to be executed. We distinguish two types of NDD: the STP and the ECN.
- STP Brokers
Straight Through Processing (STP) technology does not require a desk. All orders are routed to the fx company's cash suppliers and prices are executed at the bid / ask rate provided by the liquidity providers.
The liquidity providers, in this case, are hedge funds, large banks, and investors who effectively act as counterparties for each transaction. As a normal rule, the STP trading company has an internal cash pool represented by different liquidity providers, who compete for the best bid/ask spreads for STP broker orders.
More generally, STP means that the brokerage acts as a silent connection provided between the market and the trader, rather than a processing center for re-processing transactions. Please note that SGT Markets exclusively uses the STP model. The other advantage of an STP broker is the "DMA". DMA means direct access to the market.
DMA is the time when a currency trading company places his clients' orders directly in his cash pool, so orders are processed at the best price possible, with only a small margin distributed by the FX brokerage.
This actually offers the best possible distribution for its clients. The execution of the STP is simply unrequited and, because of its speed, it is perfect for traders who like scalping and exchanging news.
- ECN Brokers
It’s true that a few years ago, the MT4 ECN seemed excessive. In fact, the initial reaction to this concept was that it seemed impossible. If a Forex trader wanted to use the standard platform, he was supposed to trade only with one broker.
Nevertheless, the demands of the retail forex trader have come to be heard and MT4 ECN has been developed in response.
There are many similarities between STP and ECN brokers, but the main difference is routing. As mentioned above, the STP may choose to deal with different liquidity providers outside its cash pool, while ECN acts as a kind of hub.
Next: How to choose a trusted company to deal with profitable trading?