The majority of Forex brokers work under the ECN, DMA, and STP broker models. However, some may use a combination of both. You can compare Forex brokers by looking at how they handle customer transactions. Also, look at whether they accept the transaction or the opposite side.
Understanding the workings of each model is important so you can choose the right order execution method to run your Forex brokerage.
ECN Forex Broker Model Forex brokerages using an Electronic Communication Network model offer their clients a direct route to the Interbank Forex Market for pricing and execution through an ECN trading platform.
A broker can use the ECN execution model to execute their client’s transactions. This allows them to effectively have a No Dealing Desk position (NDD), as they act as a intermediary between their clients, and the larger currency market. A trader can avoid both the market maker as well as their dealing desk, who will likely profit from their transactions by choosing to deal through an NDD Forex broker.
ECN brokers often display exchange rates and order information in real-time as they fluctuate. Their pricing for transactions also comes directly from Interbank Forex market. ECN brokers have a lower chance of human error because trades are electronically handled.
This brokerage has the advantage of virtually eliminating the possibility of re-quotes. This is a significant advantage for news traders who enjoy high market volatility around major economic data releases. ECN brokers offer traders the opportunity to trade spreads that are substantially lower than those quoted by single market makers.
Brokers that use the ECN model may charge a flat execution fee per trade as a commission. This is a benefit for those who trade more frquently but with larger amounts.
ECN brokers can also increase the trading spread to allow their clients to trade on, and then charge fees proportional to the trade amount. This type of ECN broker might be more suitable for traders who trade frequently, but in smaller amounts.
STP Forex Broker Model STP forex brokers that use Straight Through Processing (STP), usually have an automated trading system available for their clients. They are also known as No Dealing Desk brokers because they do not have a trading desk. This broker model is often called the forex brokerage model.
STP works by electronically processing every trade and then entering them anonymously and directly into an Interbank Forex market participant (i.e. Liquidity providers to execute at competitive prices