Whether you are interested in obtaining a license to operate as a broker, or even if you are just getting started in trading, one of the most important things to know is that there are different types of Forex brokers. The difference between each broker lies basically in how your clients’ transactions will be executed.
If you are a broker in training, deciding on one type or another is essential, but also if you are interested in building confidence as a Money Manager, because the conditions under which you can trade on Forex depend on it. The profitability of your activity derives from making the right choice, and that is why we are here.
In another post we have already explained what a broker Forex is. Now we will specifically address the two main types of Forex brokers that fall into the category of broker: Dealing Desk (DD) also called Market Makers and Non-Dealing Desk (NDD) such as DMA, SPT or ECN brokers. But first, you should know some details about trading desks and interbank liquidity.
Learn about the types of Forex brokers:
Trading desk and interbank liquidity
The trading or dealing desk refers to the physical space where the broker’s foreign exchange transactions take place. Depending on the size of the company or financial entity, it may even have hundreds of traders who control and perform transactions. It is also mentioned that they make their own market, and are called Market Makers.
Liquidity, on the other hand, refers to the possibility of quickly converting assets into money. This means that the wider and more dynamic the market of a currency, the greater the liquidity of that market. In another article we have developed the subject in more depth.
But liquidity, in the aspect that concerns us with NDD Brokers, refers to the fact that traders’ operations are executed in the interbank liquidity, i.e., in the real market.
The Forex market is based on this continuous buying and selling, which is required by banks to establish a decentralized market and obtain the best prices from competition. In the case of brokers, this allows them to generate profits from spreads between banks, currencies and specific time periods, in addition to transaction fees.
DD Forex Brokers
You have probably already heard of large companies that have a trading desk. They are known as Market Maker or DD broker (dealing desk), and they actually build an internal market, so they do not depend on interbank liquidity.
This allows them to coordinate and establish bid/ask prices, thus generating a kind of internal market. As a result, they have extensive control over transactions and can offer traders an in-depth view of the market.
NDD Forex Brokers
Those that do not have a dealing desk are known as NDD (Non-Dealing Desk). This category includes ECN, SPT and DMA Forex brokers. They execute their clients’ transactions based on actual prices, between individuals, companies or institutions. They are therefore ultimately dependent on interbank liquidity.
One of the consequences of this is that as an NDD broker, you will always work with variable spreads and transactions will be quite transparent. NDD brokers establish contracts and relationships with liquidity providers, mostly banks, through an external technology platform.
This means that you should carefully choose a provider that is suitable for your operations. Also keep in mind that the speed of connection and price volatility in the market may cause some discrepancy when displaying the results.
On the other hand, this type of Forex broker accepts various trading strategies such as scalping and swing, so it is the most popular type of broker in Social Trading. Traders will have the possibility to perform their operations with access to the market order book and will have an overview of the market and its movement in real time.
In the broker world, not everything is black and white. There are many brokers that use combined DD and NDD platforms, whether regulated or not. This allows the advantages of one or the other system to compensate for market weaknesses and to adapt to different business strategies.
For some, this option is very interesting, but it requires a very clear operating policy. That is why you should carefully analyze the types of Forex brokers and what you are interested in building or using, always evaluating your real possibilities and the direction of your business.
If you are just starting out in this field, you should first master how to become a broker. The best thing to do is to start out safe and well advised. At Smart Broker Solutions we have everything you need in Forex licenses, advice, training, liquidity service and technological and corporate solutions… Everything you need to have your own successful Broker. ¡Contact us!