Discussion Topic: Dealing Desk vs No Dealing Desk
As part of our previous tutorial on how to choose the best forex broker, we have told you that you must check if the broker id dealing desk broker or no dealing desk broker. Now in this article, we will discuss the difference between dealing desk vs no dealing desk forex brokers, so that you can choose the best one to start your forex trading career.
Defining the Types of Forex Brokers
Broadly, there are two types of forex brokers:
- Dealing Desk (DD) Brokers
- No Dealing Desk (NDD) Brokers.
Dealing Desk brokers are also widely known as Market Makers. We will explain why.
No Dealing Desk brokers are further subdivided into:
- Straight Through Processing (or STP Brokers) and
- Electronic Communication Network + Straight Through Processing (or ECN+STP Brokers).
What is a Dealing Desk Broker? - Meaning & Definition
A dealing desk forex broker also called as a market maker. By definition, a dealing desk broker is a type of broker who takes the other side of their client’s trades, by fixing the bid and ask price and waiting for a trader who would place an order with their setup.
Dealing desk brokers mostly generate profit by buying at lower prices and selling at higher prices, and by capitalizing on the spreads between the bid and ask price.
Mostly, dealing desk brokers try to keep trades safely within their own liquidity pools and do not usually require any external liquidity providers. They also take the opposite side of the trade placed by the traders. By doing this way, they literally create a separate market for their clients; hence, they are called as the market makers.
Many people ask that what is the difference between dealing desk vs market maker, now I think you understood that the dealing desk and market maker are the same.
How Dealing Desk Brokers Work?
As we learn from the above, the market makers provide both the buy and sell quotes, which mean that they are filling both sell and buy orders of their clients. They also control the prices at which orders are filled, so that it imposes a very little risk for them to set fixed spreads.
Moreover, clients of dealing desk brokers do not get the real interbank market rates. But don’t be scared. Nowadays, the competition among brokers is so high that the rates offered by dealing desks brokers are very close to the interbank rates.
That is the main reason, why some think that this type of broker (market maker) takes advantage of the trader, while many other traders appreciate their approach of offering fixed spreads.
Trading using a Dealing Desk broker basically works this way:
Let’s consider that you placed a buy order for EUR/USD for 1 Lot with your Dealing Desk broker.
To fill your order, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity providers (other financial institutes, banks etc). By doing this, they minimize their risk, as they earn from the spread without taking the opposite side of your trade.
However, in case that there are no matching counter orders, they will take the opposite side of your trade. [But they may not fill all the orders, depending on their risk management policies]
Please note that every individual forex brokers have their own risk management policies, so be sure to check with your own broker regarding this.
What is a No Dealing Desk Broker?
As the name signifies, No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk, rather, they send those orders directly to market (liquidity providers, banks, other brokers etc). It implies that they do not take the other side of their clients’ trade, as to the contrary, they work by simply linking two opposite parties together.
No Dealing Desk Brokers act like bridge builders: they just match two opposite trades placed by two different traders and make a bridge to join them.
To provide this bridging service, No Dealing Desk Brokers usually charge a very small commission for trading or they just put a markup by increasing the spread slightly.
As said earlier No Dealing Desk brokers can be of two types STP or STP+ECN.
What is an STP Forex Broker (NDD)?
Forex brokers offering STP system route the orders of their clients directly to their liquidity providers who have access to the real-time interbank market.
No Dealing Desk STP brokers usually work with many liquidity providers, with each provider quoting their own bid and ask prices. Now we will see how the bid/ask price is determined here.
For example, consider your NDD STP broker has three different liquidity providers. So, in their system, they will see three different quotes of bid and ask prices for each of the currency pairs as below:
Liquidity Provider A: Currency Pair: EUR/USD, Bid Price: 1.1251, Ask Price: 1.1254
Liquidity Provider B: Currency Pair: EUR/USD, Bid Price: 1.1250, Ask Price: 1.1252
Liquidity Provider C: Currency Pair: EUR/USD, Bid Price: 1.1252, Ask Price: 1.1254
Hence, the best available bid price for EUR/USD is 1.1252 (selling high) and best ask price for the same pair is also 1.1252 (buying low). Pretty amazing!
But would you get that quote? Certainly not!
The broker will add some small markup on top of that quote before sending that to you. If their policy is to add a 1-pip markup, the quote you will see on your platform would be 1.1251/1.1253. Hence, the 0-pip spread for them will show you a 2 pip spread on your terminal. [See our guide on calculating pip and pipette]
So, when you decide to buy/sell 1 Lot (100,000 units) of EUR/USD at 1.1253/1.1251, your order will be received by your broker and then routed to either Liquidity Provider B or C.
If your order is filled, Liquidity Provider B or C will have a short/long position of 100,000 units of EUR/USD 1.1252, and your broker will earn 1 pip in revenue.
Due to this mechanism of sorting variable quotes, most STP type brokers have variable spreads. If the spreads of their liquidity providers widen, you will also get a quote with a wider spread.
What is ECN+STP Broker (NDD)?
The ECN+STP forex brokers are more advanced than normal STP brokers, allowing the orders of their clients to be sent to a whole group of other participants in the ECN. Those participants could be banks, hedge funds, retail traders, and even other brokers.
Here, participants trade against each other by quoting their best bid and ask prices. Same as the normal STP brokers, they also charge small commissions on the spread they get.
As we have learned all the variants of forex brokers, we will now see the comparison between dealing desk and no dealing desk brokers.
Dealing Desk vs No Dealing Desk Forex Broker (Comparison)
|NO DEALING DESK|
|NO DEALING DESK|
|Spread||Fixed Spreads||Variable spreads||Variable spreads and/or commission fees|
|Order Execution||Take the opposite side of your trade||Simply a bridge between client and liquidity provider||A bridge between client and liquidity provider and other ECN participants|
|Quote Prices||Artificial quotes||Prices come from liquidity providers||Prices come from liquidity providers and other ECN participants|
|Order Filling||Orders are filled by broker on a discretionary basis||Automatic execution, no re-quotes||Automatic execution, no re-quotes|
|Real Market Info||NA||NA||Displays the Depth of Market (DOM) or liquidity information|
Dealing Desk vs No Dealing Desk: Pros and Cons
The main advantage of dealing with a dealing desk broker (market maker) is that you will get 100% fill rate even in an extreme non-liquid market condition. They also offer a fixed spread whereas no dealing desk offers variable spread.
One of the greatest problems with a dealing desk broker is that they are quite often the person on the other side of the trade you take. This reflects a significant conflict of interest. So, internally, your broker would always have a vested interest in seeing you lose on the trade.
The second problem with some of the dealing desk forex brokers is that you may witness a delay when getting your order filled. This is because these dealing desk brokers still operate in a manual mode that needs them to manually approve every trade they receive. At the time of heavy trading volume, you may find that you get slipped some pips before your trade gets filled, hence, sometimes may result in losses. Although this point is not valid for every dealing desk, but still applies to many of them.
Dealing Desk or No Dealing Desk: Final Thoughts
Which type of broker you choose completely depends on your trading style. One type of broker isn’t better than the other in all conditions.
It is up to you to decide whether you would like to have a tighter spread or you will be comfortable in paying a commission on a variable spread per trade.
Usually, day traders and scalpers prefer 100% fill rate, tighter spreads, and less commissions because it becomes easier for them to take small profits. Hence, they used to choose a dealing desk broker. However, for long-term swing or position traders a variable spread and small commissions tend to be insignificant, hence, they often choose no dealing desk brokers.
We hope that you have enjoyed the above article illustrating the difference between a dealing desk broker and a no dealing desk forex broker. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about dealing desk vs no dealing desk forex brokers, we will be happy to help you.