When it comes to varieties of Foreign exchange brokers, most sources you can find on the internet will categorize them depending on the following terms: dealing desk, market makers, no-dealing desk, straight through processing, electronic communication networks, direct market access, introducing, as well as probably find another term for describing basic broker type. The real question is the best way to organize every one of these terms in the meaningful way.
One thing you'll be aware is who organizes the market for you together with who the counterparty of the trades is. In regards to this question two a variety of FX brokers exist: what are named as dealing desk brokers (DD) and no-dealing desk brokers (NDD). DD brokers will be the market, meaning, broker itself is the counterparty of one's trades in order to put it differently, broker trades against you. Since DD brokers represent a market, also, they are called market makers (MM). They benefit from the spreads as well as in the trades. They prefer traders who loose, unsuccessful traders, because they make brokers profitable. Wining traders on the other side force brokers to hedge about the interbank market, causing them additional cost so they aren't among most wanted clients. Obviously, reputable FX trading providers manage this professionally, while with some more 'exotic' brokers you might be inspired to close the account leave, if you are too successful.
NDD brokers unlike DD brokers route your orders to 'real' market. When speaking about Forex, real companies are a group of banks, funds, as well as other kinds of liquidity providers (LPs) - institutional intermediaries. The more LPs you can find inside the group, the better conditions for trading are established - higher liquidity, lower costs regarding spreads. You will find basically two types of NDD brokers: STP and ECN. STP is short for Straight Through Processing while ECN is short for Electronic Communications Network.
Let begin with ECN first. This is a pool of LPs once Forex broker joins the network, it gets coupled to the market and can enjoy liquidity as well as other the best-selling whole network, not understanding and signing any agreement with another member. Certain costs of joining and staying member of such network exist. Once the client sends an order to ECN broker, it routs it further on the market which is filled from the LP who provides best conditions/price. The counterparty for these trades might be anyone from the network. As a result of many members clients can also enjoy the depth in the market (level 2) within their trading platforms. New trading, scalping and other special techniques are certainly not an issue with ECN brokers.
STP brokers are similar to ECN, but instead of joining existing LP pools, broker has got to sign a partnership with every LP separately. The more LPs it's signed a partnership with, the better for clients. What's to be noted is always that not every STP brokers are the same. They differ about that's the counterparty with the trade you make. Some STP brokers provide direct market access (DMA), in that case your order is automatically routed on the market and any LP can be the counterparty - the one with best conditions. Some STP brokers on the reverse side trade against you (they fill your order) and after that hedge within the real market of LPs to get rid of the risk.
To date we've got clarified almost all of the terms about Fx broker execution types. Usually the one we didn't yet discussed is Introducing Broker (IB). This really is nothing else than extended hand of existing broker, wanting to generate more business. You will discover IBs for DD and NDD brokers.
While some brokers define themselves as you kind of broker and make their marketing strategies on the advantages, it is usually challenging to say the exact type of order execution another Forex broker is providing. Well, there are specific facts on which you'll be able to reveal type of broker, as an example: ECN and DMA brokers will forever provide variable spreads never fixed; ECN brokers charge trading commissions, while some mostly earn through widened spreads; level 2 quotes are only available with DMA and ECN brokers; etc. Many brokers work with a hybrid model, providing for example DD execution on Micro and Mini accounts, while providing NDD solution on Standard accounts.