Retail foreign exchange trading has become popular since 2000. Comprising numerous forex brokers across the world, the ecosystem of this industry runs different types of trading models. These types of trading models have their unique names—DD, NDD, MM, STP, and ECN are among those commonly seen.
Classification of trading platforms
Forex brokers mainly run the online trading platforms and the trading models are separated into two categories: Dealing Desk (DD) and No Dealing Desk (NDD).
Dealing Desk is also known as Market Maker (MM). The model of No Dealing Desk is subdivided into Straight Through Processing (STP) and Electronic Communications Network (ECN).
DD and MM
Dealing Desk and Market Maker mainly provide liquidity of forex market. Even when the trading activities are not active, the brokers can still buy and sell foreign currencies by reserving profits for themselves and offering a price for participants in the marketplace. The brokers then become the counterparties of the traders. The transaction prices that traders see might not be the real market prices. Due to stiff competition in over-the-counter (off-exchange trading) forex trading, however, these transaction prices usually are very close to market prices.
Mainly connecting market liquidity, No Dealing Desk allows the orders of traders to be paired up with banks, other brokers, and liquidity providers. Therefore, these forex brokers would not become counterparties of traders. In general, trading volume of individual retail traders is smaller in scale and they need a broker platform as a bridge. Without such a platform connecting, individual retail traders can hardly trade directly in the interbank foreign exchange market. In the industry, trading conducted in the form of NDD is divided into so-called STP and ECN.
Straight Through Processing refers to a forex brokerage model whereby the orders of traders will be directly sent to banks, other brokers or offerers without the interference of brokers. This is how STP works. Brokers of STP connect to several liquidity providers and the traders can see real-time market prices in the platform and execute their orders immediately.
Electronic Communications Network refers to a system which integrates electronic trading network. The network consisting of retail forex traders, institutional investors, banks, hedge funds, and brokers allows participants to trade and match orders with each other. Through the ECN system provided by brokers, traders directly issue orders anonymously to the marketplace. The transactions are made in the fairest manner according to real-time, the most competitive and genuine market prices.
There is a certain degree of conflict of interest between DD or MM models and traders. This explains why many traders prefer NDD—the STP or ECN forex trading platforms. It is worthwhile to pay attention that this does not make the legality of any transaction model questionable. Brokers can also run their retail business in the DD or MM model according to law and regulation.
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted by this article. Please be firm in your thinking and do the corresponding risk control.