Forex brokers come in all shapes and sizes, but they can broadly be classified into four main types of brokers. These are dealing desk (DD) brokers, no dealing desk (NDD) brokers, straight through processing (STP), and electronic communications network (ECN) brokers.
There are a few differences between these types of brokers which we will explore in this guide, along with the order book types that the brokers may operate. Each of these points can have an impact the way your order is filled, so it is a good idea to have a basic understanding at the very least.
4 Main Types of brokers In Forex Trading
Whilst we are going to explore the 4 main types of forex brokers in a bit more detail below, we should provide a caveat to our upcoming descriptions… that is that many brokers can operate in multiple ways, and one is not definitively operating as outlined below exclusively.
The regulation that each broker is granted allows them to operate in either of the models, there are no differences from that standpoint as far as the licence goes. The differences are effectively the chosen business model of the broker, and the operational preferences they have.
So now, on to the different types of brokers in forex you will want to know.
Dealing desk brokers :
DD brokers act as market makers and take the other side of your trade. This means that they are always willing to buy or sell currency pairs at the current market price, at their own risk. Dealing desk brokers make their money from the losses of their clients… yes really.
There are cases where a DD broker may want to offset some of the risk, and they can do that via their own processes, but in most cases, this type of forex broker is willing to take the risk that eventually you will lose.
Non-dealing desk brokers :
Non dealing desk brokers, on the other hand, do not take the other side of the trade, but pass it on to a liquidity provider. They send your trade directly to the interbank market, where it is matched with another trade from a bank or another NDD broker from a pool of liquidity.
NDD brokers make their money from commissions, or spreads, which are usually a small percentage of the value of the trade.
Straight through processing brokers :
Straight through processing (STP) brokers are a type of NDD broker that route your order directly to their liquidity provider; meaning the order goes ‘straight through’.
The liquidity provider is usually a hedge fund, large bank, or other major market participant and an STP broker would have systems that allow them to select the best available option from the various liquidity pools they are connected to.
Electronic communications network brokers :
ECN brokers are another type of NDD broker that provide access to the electronic communications network for liquidity. ECN and STP are rather similar, but the ECN is a network of banks, hedge funds, and other large institutions that trade with each other.
Order Book Types : A-Book and B-Book Brokers
Within the different types of forex broker, you also have two different order book styles. These are referred to as A-book and B-book brokers.
A-book : effectively means that the broker is directly routing your order through to a liquidity provider, and are usually rewarded financially with a preset volume based commission.
B-book : means that the broker is taking the other side of your trade themselves. They are the market maker. Your order is not sent to the interbank market, but rather stays within the broker’s own system. When you lose, they win. When you win, they lose.
When you trade with an A-book broker, you are essentially trading with the market. Your order goes straight to the source of the market price, without interference from the broker. This is what is generally considered as trading “the real market”.
B-book brokers operate in a different way. When you place a trade with them, they don’t route your order to the real market. Instead, they match it with another trade placed by another one of their clients, or they take the risk of the trade on themselves, which can create conflicts of interest.
It’s also worth noting that many B-book brokers are actually market makers, which means they set the prices you see on their platforms.
Main types of brokers in summary
So, what’s the best type of forex broker? Well, this depends on what you’re looking for, and in part, the order size you are happy to deal with.
The ECN network often allows trade sizes upwards of 0.1 lots, and if you are wanting to trade less than that, then a broker that offers an alternative form of market access may be better suited.
An STP broker may offer direct market access (DMA), which allows you to trade directly through to the liquidity provider, with usually just a small spread payable to the broker for the pleasure.
Dealing desk brokers can effectively set their own requirements on trading size, market access times, and, as they are not dependent upon a liquidity provider to fill the order, you can usually always get your trade filled, even in relatively illiquid markets.
A broker taking the other side of your trade and profiting when you lose may not seem like something you are happy with, and the potential for a conflict can be off-putting.
Due to their revenue model being linked to volume, and not result, NDD brokers are effectively hoping you can trade more volume consistently, so that the spread is paid more often. This is more in line with your own hopes as a trader (to grow your account value), and as such is our own preference, but what is right for you, is left up to you.
Overall, there is not one type of broker that is definitely better than another, but each person will have their preferences, I know I do.