6. Trading Models, What are they?
Forex brokers mainly run online trading platforms and the trading models are separated into two categories:
1. Dealing Desk (DD) / Market Maker (MM)
The term Dealing Desk is also known as Market Maker (MM).
2. No Dealing Desk (NDD)
The model of No Dealing Desk is subdivided into Straight Through Processing (STP) and Electronic Communications Network (ECN).
What are the DD and MM Trading Models?
The Dealing Desk and Market Maker mainly provide liquidity for the forex market. Firstly, even when trading activities are not active, brokers can still buy and sell foreign currencies by reserving profits for themselves and offering a price for participants in the marketplace. Secondly, brokers then become the counterparties of the traders. Thirdly, the transaction prices that traders see might not be the real market prices. Finally, due to stiff competition in over-the-counter (off-exchange trading) forex trading, however, these transaction prices usually are very close to market prices.
What is NDD Trading Model?
Mainly connecting market liquidity, No Dealing Desk allows the orders of traders to be paired up with banks, other brokers and liquidity providers. Therefore, these forex brokers would not become counterparties of traders. In general, the trading volume of individual retail traders is smaller in scale and they need broker platforms to act as a bridge. Without such platform’s for connection, individual retail traders can hardly trade directly in the interbank foreign exchange market. In the industry, trading conducted in the form of NDD is divided into so-called STP and ECN.
STP Trading Model
Straight Through Processing refers to a forex brokerage model whereby the orders of traders will be directly sent to banks, other brokers or offerors without the interference of brokers. This is how STP works. Brokers of STP connect to several liquidity providers and the traders can see real-time market prices in the platform and execute their orders immediately.
Related Article: What is market liquidity?
ECN Trading Model
Electronic Communications Network refers to a system that integrates an electronic trading network. The network consisting of retail forex traders, institutional investors, banks, hedge funds and brokers allows participants to trade and match orders with each other. Through the ECN system provided by brokers, traders directly issue orders anonymously to the marketplace. Transactions are made in the fairest manner according to real-time, competitive, and genuine market prices.
There is a certain degree of conflict of interest between DD or MM models and traders. This explains why many traders prefer NDD — the STP or ECN forex trading platforms. It is worthwhile to note that this does not make the legality of any transaction model questionable. In conclusion, Brokers can run their retail business using the MM or DD models following set law and regulation.
Next Article: 8. Foreign Exchange (FX / Forex) Market
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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted by this article. Please be firm in your thinking and do the corresponding risk control.