Although some may employ a combination of two or more, the majority of Forex brokers typically use ECN, DMA, and STP broker models. You may evaluate different Forex brokers by comparing how they deal with transactions or if they accept orders from the other side if the transaction is through their platform.
To choose the optimal model that best fits your trading style, it is best to understand the different forex broker models.
ECN
ECN trading or Electronic Communication Network platform offers traders direct access to the interbank foreign exchange market.
A broker has an NDD or a No Dealing Desk stance when they use the ECN execution mechanism for their clients’ transactions since they are acting as a go-between for clients and the currency market.
By dealing with an NDD Forex broker, a trader can avoid a market maker who earns from transactions. Most ECN brokers show the fluctuation of exchange rates in real-time. In addition, the transaction price is also directly from the interbank foreign exchange market.
ECN brokers often have a lower rate of human error since transactions are conducted electronically. In addition, there are no requotes which is great for traders who seek to profit from the significant volatility of economic news. Brokers who operate under the ECN model offer a flat fee per transaction. This is advantageous for individuals who typically trade less but with large amounts of money.
As an alternative to traders who want to trade often but in lower quantities, some ECN brokers offer wide spreads to allow their clients to deal and levy fees based on the volume of each trade.
STP
Straight Through Processing or STP forex brokers often provide their clients with access to a completely automated trading system. They are referred to as No Dealing Desk or NDD brokers since they don’t run a dealing desk. Another name for this broker’s business approach is the A-Book Forex brokerage.
The STP system processes each deal electronically and enters it directly and anonymously into a group of participants in the interbank foreign exchange market for execution at market rates.
The most notable benefit of utilizing an STP broker is that traders avoid having other individuals meddle in their negotiations, thus there are human errors, delays, or expenses connected with transactions.
Greater liquidity is another benefit of using an STP broker because prices are obtained from several market participants rather than just from one source. This leads to better fills, tighter trading spreads, and more accurate quotes.
DMA
Direct Market Access or DMA is a methodology that certain forex brokers employ when carrying out customer transactions. This platform matches the customer orders with transaction prices provided by top liquidity sources automatically.
DMA is a more transparent process from the perspective of the trader since it solely uses NDD at market price. As opposed to this, the quick execution services provided by certain brokers often entail the broker completing orders before deciding whether or not to transfer the risk to other liquidity providers.
Hybrid
Some brokers choose to combine the aforementioned principles into a hybrid one because some traders think that this approach offers the most advantage.
In order to establish a fully electronic Forex dealing service, a hybrid is a blend of several models such as STP, DMA, and ECN trading. With the use of this idea, a broker may totally automate order input while still managing pricing of spreads and executions.
