What's the difference between NDD, STP and ECN Forex brokers? Table of Contents

What do Forex Brokers do for investors?

The forex market has no physical trading venue it is a worldwide computer network that connects all market participants to each other.

Access to the forex market can only take place through the figure of a broker.

Forex brokers play an essential role in every trader’s life:

  1. Provide access to the market by making their trading software available;
  2. Protect the traders’ funds;
  3. Some categories of brokers also come to represent the market by acting as the interface between the interbank FX market (where large banks operate) and retail traders.

Not all forex brokers are made the same way.

There are differences in the structure and function of each broker, especially when dealing with individual traders.

So what types of brokers are there?

  1. Market maker, also known as a dealing desk (DD) broker.
  2. Direct Market Access Brokers (DMA), also called non-dealing desk (NDD) brokers or Straight Through Processing (STP) brokers.
  3. ECN broker (Electronic Communication Network).

Now let’s look at these different types of brokers in more detail, looking at the pros and cons of each brokerage model.

See the list of Forex Brokers

What is a Market Maker FX Broker?

Most retail traders in the forex market will work with the class of brokers known as dealing desk brokers or market makers.

These types of brokers are called market makers because they “create the market” for retail traders.

Trading Forex on the interbank market requires a lot of liquidity.

Retail traders generally do not have access to finance capable of producing such a cash buffer.

This is where market makers come in.

They form a bridge between the interbank market and retail forex traders.

To do this, they buy large positions from liquidity providers, then resell them to retail clients in the form of packages large enough to satisfy their cramped accounts.

Therefore, the broker creates a new market parallel to the main market, and which can adapt to the liquidity conditions of traders.

Basically, Market Markets put themselves on the other side of the trade.

The process just described takes place entirely in the broker’s dealing desk department.

This is why this class of brokers is known as dealing desk brokers.

The execution of traders’ orders takes place “in-house”.

Standard features of Market maker brokers are:

  • In-house order execution
  • Fixed spreads
  • Potential for quick execution if the broker offers low latency servers
  • No commissions on trading
  • Single price quotes
  • Lower entry barrier

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What is an STP FX Broker?

Straight-Through Processing (STP) brokerage firms are also known as Direct Market Access (DMA) brokers.

These brokers offer their traders direct access to the interbank FX market, where pricing and execution are done by large banks acting as liquidity providers.

Their product offering is primarily designed for professional traders who have the experience and liquidity to deal with the large volumes of trades that are carried out at the interbank level.

You need far more capital to get involved in this system.

See the list of Forex Brokers

What is an ECN FX Broker?

Electronic Communications Network (ECN) brokers may also route their clients’ orders to the interbank market, but they do not necessarily channel them to liquidity providers.

Sometimes they transmit orders to other players on the interbank FX market who can accept these offers, such as prime brokers.

All ECN brokers are straight-through processing (STP) brokers, but not all STP brokers are ECN brokers.

Trading on ECN or STP platforms requires a large capital outlay, which increases the entry barrier.

These brokers tend to provide price quotes based on different sources, with varying spreads.

Standard features of ECN and STP brokers are:

  1. List various price quotes;
  2. All their clients’ orders are executed in the interbank FX market directly with liquidity providers or other prime brokerage firms. Therefore, they do not create a market;
  3. Spreads are not fixed;
  4. Capital requirements are high, which holds back many of the retail traders;
  5. Exchanges attract commissions on both sides of the trade (i.e. entry and exit).

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What kind of broker is AvaTrade?

AvaTrade is considered a “Market Maker”, with its own internal dealing desk.

This is because AvaTrade creates the market and completes all your trades for you.

This has many advantages for investors.

As market makers provide internal prices, in relation to the cost of such positions incurred on the interbank FX market, spreads can be kept as low as possible and can remain fixed.

Furthermore, since the market maker is the source for both prices and executions, the broker can co-locate execution servers close to the market’s trading centers (London or New York).

This co-location reduces latency (i.e. the time it takes to transmit data from the trader’s front end to the back end and back to the trader’s station).

Lower latency ensures faster executions.

These executions can become even faster if a virtual private server is used.

In this case, the trader’s computer can be connected to the broker’s remote server, thus eliminating trade queuing factors, which could delay executions, such as slow internet connections.

Using a market maker who also offers clients a Forex VPS can be the way to go if you want faster executions, and you can even hire one, especially if you plan to engage in automated trading via EAs on MT4.

Go to AvaTrade Official Website

Does AvaTrade outsource market liquidity?

Sometimes, brokers like AvaTrade will cover trades by outsourcing them to third-party liquidity providers.

This is a way for brokers to manage their risk and exposure, just like a trader would.

This process is managed by the internal Dealing Desk and does not involve the trader in any way, as well as ensuring a smooth and uninterrupted trading experience in which all his positions will be filled quickly and as required, without the risk of slippage.

There are many reasons to choose AvaTrade as a broker.

AvaTrade has a strong and solid experience in executing orders and satisfying every customer, as evidenced by the numerous awards won over the years.

Open an account with AvaTrade