Choosing a broker you can trust is no small feat.
Due to the unregulated nature of the foreign exchange market and the increasing number of unscrupulous companies marketing false information, the unaware often fall victim.
Fortunately, a number of reputable brokers provide reliable services, many of which are well known in the industry and fully regulated by relevant authorities.
All being well, the following piece will help guide traders, underlining key features regarding the range of trading models brokers offer, with a particular emphasis on ECNs.
Dealing desk vs. non-dealing desk
Understanding terminology in the trading domain is critical, specifically when involving trading models brokers use to conduct business.
Dealing desk (DD):
Orders sent through from clients are not directed to the interbank market using this model. This is because the broker often, through means of a dealing desk, acts as the counterparty to trades, therefore providing liquidity and, in effect, becoming the market, hence the term ‘market makers’.
Brokers conducting business in this category, sometimes referred to as B-book brokers, generate revenue through means of a service fee or commission whenever buy/sell orders enter the system. In addition to this, they produce profits on the difference between the bid/ask spread, and, as mentioned above, also on acting as a counterparty to clients should they be unable to filter risk to other clients.
Features of a dealing desk:
- Fixed spreads.
- DD brokers can (and do) take the other side of trades.
- Artificial quotes and orders filled by the broker on a discretionary basis.
Non-dealing desk (NDD):
The opposite of a DD broker is a non-dealing desk broker (NDD), sometimes referred to as an A-book broker, who are often described as ECN (electronic communication network) brokers or STP (straight through processing) brokers.
Although these brokers differ slightly in their offerings, both models route clients’ orders directly to liquidity providers. This allows clients access to raw interbank markets. It is effectively a bridge between clients and liquidity providers, through means of an ECN/STP broker: the intermediary. Liquidity providers can include banks, hedge funds, investment corporations or another broker.
STP – Straight Through Processing:
STP or Straight Through Processing brokers automatically direct clients’ orders to their liquidity providers. Put another way, the STP broker are not filtering client’s orders through a DD.
With the absence of such an intermediary process (dealing desk) the STP broker will be able to process its client’s orders generally without any delay as prices fill at the bid/ask rate provided by liquidity providers.
Usually, the STP broker has an internal pool of liquidity represented by different liquidity providers competing for bid/ask spreads for STP broker orders.
Features of this particular model are:
- Variable spreads.
- Real interbank pricing.
- Automatic execution and no re-quotes.
ECN – Electronic Communications Network:
An ECN, or Electronic Communications Network, is best described as a ‘bridge’ linking market participants with liquidity providers through means of an ECN broker.
Thanks to FIX protocol technology, ECN brokers link with tier-1 liquidity providers, offering clients institutional grade liquidity from the world’s leading investment banks. The ECN matches and executes orders requested.
The ECN network is vast and generally includes a number of liquidity providers. This affords an element of anonymity, allowing traders the advantage of neutral pricing, ensuring real market conditions are reflected at all times. Due to this anonymity, the network is free from any bias or conflict of interest, unlike that of a DD broker.
Although similar in many respects, a major difference between an ECN model over a STP approach is STP brokers typically have a smaller number of liquidity providers, whereas, as highlighted above, ECN brokers can have multiple. In addition to this, many ECN brokers display the depth of market (DOM) and liquidity information.
Am I trading with an ECN broker?
This is a concern many traders have. Below are some points to keep an eye open for which may indicate an ECN model:
- Bid/ask spreads are not fixed with an ECN broker. Open your tick chart and you’ll see the difference between the bid/ask prices. The bid price is there to execute a short (sell) position, whereas the ask price (or ‘offer’ as it’s sometimes called) is there to trade a long (buy) position.
- ECN brokers seldom offer bonuses and discounts to open an account. This type of practice is typically reserved for market makers. ECN brokers generate sufficient revenue through commissions and spreads.
- If negative slippage is common, then it’s unlikely an ECN broker you’re trading with. Though slippage is a normal occurrence in the markets, slippage is normally both positive as well as negative. Slippage is the difference between the rate requested and the rate executed, and is typically due to the fact prices across various financial instruments often change rapidly in milliseconds or less.
- Traders usually acquire more favourable bid/ask pricing as they’re derived from multiple liquidity providers.
- ECN brokers charge clients a fixed transparent commission on every transaction.
- There are no re-quotes with ECN brokers, though slippage can occur during fast-moving markets. Similar to Slippage, a re-quote occurs when instead of slipping a trade, the broker presents the customer with the option to execute the trade at a different rate than the one they requested, when in such cases the rates originally requested are no longer available.
Selecting the right broker
ASIC regulated, IC Markets offers market-leading pricing and trading conditions through the award-winning MetaTrader (MT4) 4/5 trading platforms by providing clients with True ECN Connectivity.
True ECN Connectivity allows clients to trade on institutional grade liquidity from the world’s leading investment banks, hedge funds and dark pool liquidity execution venues. Executable Streaming Prices (ESP) are sent from IC Markets’ liquidity providers to the ECN environment where clients can trade with no dealing desk, price manipulation or re-quotes. Due to the diverse liquidity mix consisting of up to 50 different liquidity providers at any one time, IC Markets is the forex broker of choice for high volume traders, scalpers and robots who demand tighter bid/ask spreads and ultra-fast trade execution.
IC Markets True ECN account also offers some of the lowest possible spreads available. The average EUR/USD spread is 0.1 pips, with only a small commission of $3.50 per lot payable.
IC Markets’ MetaTrader 4 and 5 platforms have no restrictions on trading. We have some of the best trading conditions for scalping and high frequency trading globally. Further adding to this, we offer level II pricing market depth. Depth of market shows the full range of executable prices coming directly from liquidity providers. Depth of market offers complete transparency of the liquidity of each currency pair, showing the available volumes for each price level at any given time.
Feel free to test drive our True ECN forex demo account: https://www.icmarkets.com/en/open-trading-account/demo:
– Free to open.
– Practice until you’re ready to go live.
– All account types, platforms and products are supported.