Ad Blocker Detected
Our website is made possible by displaying online advertisements to our visitors. Please consider supporting us by disabling your ad blocker.
Forex brokers operate under different models. For the most part, they choose from ECN, STP, or DMA broker models. However, others like to mix two or more broker models, opting for a hybrid instead.
If you want to establish your own forex broker, you need to understand how each of the models works, so that you can choose the best option. If you do this right, your brokerage can make it to the top of the list of DMA Forex brokers, or STP/ECN Forex brokers.
Let’s see what each of these models has to offer.
STP Models
Straight Through Processing (STP) broker models usually involve fully automated dealing systems, which makes the client’s experience smoother. Forex brokers who use this type of model do not operate a dealing desk. For this reason, they are also called “NDDs” or “No Dealing Desk brokers”. At the same time, people refer to them as the A-Book forex brokerage model sometimes.
This model is cool because it prevents any potential human-related costs, delays, and errors when it comes to transactions. The system actually does electronic processing for each trade, adding it into an Interbank Forex market participants group directly and anonymously.
On top of the lack of human-related mistakes, the STP model also has amazing liquidity. Costs are not taken from a single liquidity provider, but rather from several market participants. For this reason, there are better fills, as well as more accurate quotes and tighter dealing spreads.
ECN Models
ECN models, or Electronic Communication Network models, are used by various forex brokerages. What makes it unique is the fact that it allows brokerages to offer their clients an Interbank forex market access option, which lets them interact with the ECN trading platform execution and pricing.
For the most part, ECN Forex brokers are able to display the current exchange rates and order information. So, even if they fluctuate, the brokers will instantly change it to the newest information, keeping customers informed at all times. This is easy to do because the transaction pricing comes from the Interbank Forex market directly.
Brokers will have a No Dealing Desk (NDD) positioning when using the ECN execution model. Therefore, they are the ones taking care of the transactions between the currency market and the clients. Traders who settle for NDD Forex brokers cut out their dealing desk and the market maker.
People love ECN models mainly because they come with a flat execution fee commission on a per-trade basis. Traders who like to trade less frequently but in larger amounts can benefit from this model.
Furthermore, there is no risk of re-quotes with this model – so, anyone who wants to enjoy the results of high market volatility usually goes for ECN models. What’s even better is that ECN brokers let traders deal on spreads that can be much tighter than the one a single market maker quoted.
There is also a type of ECN broker that increases the trading spread, allowing clients to deal on and charge fees according to each trade’s dealt amount. Traders who want to trade in smaller amounts but more frequently tend to go for these ECN brokers.
DMA Brokers
Direct Market Access or DMA brokers are usually the ones that execute the transactions of their clients. It’s a type of automated service that matches dealing prices from market makers or a different leading liquidity provider with client orders. Each client order will pass to liquidity providers when it comes to DMA models.
For the trader, the market price execution becomes a more transparent process with a DMA model because it involves an NDD or non-dealing desk.
Moreover, DMA brokers usually provide variable spreads instead of fixed ones. A DMA broker’s deal execution platform usually offers a fixed markup to client transactions or charges a commission per trade.
Model Combinations for Brokers
There are brokers that prefer to mix two or more brokerage models. For instance, there are ECN brokers that also have a DMA service. Meanwhile, some STP brokers may offer a DMA service, although very rarely.
One of the most common combinations is the DMA, ECN, and STP models altogether. This way, a fully electronic Forex dealing service is created, giving clients all the benefits they desire.
As you can see, there are several brokerage model options to choose from for forex trading. In order to choose the right one(s) for you, it’s important to establish your plans for the future and your needs.
