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How do non-dealing desk brokers execute your orders?

Non-dealing desk brokers execute orders differently comparing to market markets. The execution model has created two main types of retail forex brokers. This has also become controversial over the years. The debate of which of the two execution models are good goes on for years. In this article, you will learn how non-dealing desk brokers execute your orders. If you are already trading with a forex broker, then read through their terms to understand how orders are executed.

ECN Forex brokers, also known as Electronic Communication Networks pass on the marketing prices from various market participants that include banks as well as traders who are connected to the ECN and hence display the best possible bid/ask prices. These brokers go by different names such as non-dealing desk brokers, or STP forex brokers. From the names, it should be quite obvious as to what non-dealing desk brokers do.

ECN Forex brokers act as a counter party to the transactions but only on the settlement instead of the pricing which sets ECN forex brokers apart from Market makers. ECN Forex brokers typically offer variable spreads based on various factors such as the market volatility, trading volumes and other economic factors.

Interest rate decisions, for example is a high impact news event. This is where you will notice the spreads widening quite a bit with a no-dealing desk broker.

It is often found that traders experience literally no spreads when trading very liquid currencies such as the majors, especially during peak trading hours. But on the flipside, during off-market hours, traders can experience wider spreads. This is noticeable on exotic currency pairs such as the EURZAR or EURTRY currency pairs, especially in the mid-mornings during the Asian trading session.

If you are unsure, read about the different types of forex brokers here.

How do ECN Forex brokers make money

ECN Forex brokers make money by charging the customers a fixed commission on every transaction. ECN Forex brokers do not engage in price manipulation so the risks are much lesser in comparison to market maker type of forex brokers.

Primarily, there are two types of ECN forex brokers.

  • Retail ECN Forex brokers
  • Institutional ECN Forex Brokers

Retail ECN forex brokers get their bid/ask prices based on the liquidity providers such as banks that they tie up with as well as other traders on the same network.

Institutional ECN forex brokers get their bid/ask prices from the various institutional market makers such as inter banks, hedge fund providers and other such large institutions.

Because the ECN forex brokers or non-dealing desk forex brokers pass on your trades, they charge a commission for this service. Besides the commissions, non-dealing desk brokers can also add a small mark up to the price. So, if the liquidity provider has a EURUSD price of 1.1221, then your non-dealing desk broker can add a mark-up of 2 pips. Then, by the time you see the price, your would get a price of 1.1223.

Pros and Cons of using non-dealing desk forex brokers

Be it market makers of ECN’s each of these two types of forex brokers bring their own pros and cons to the table. As such we present below the pros and cons of trading with ECN forex brokers.

Advantages of non-dealing desk Forex Brokers

  • Better bid/ask prices due to the network’s multiple sources
  • Traders can find prices with little to no spreads at certain trading times
  • ECN Forex brokers do not act as a counter party to a trader’s positions.
  • ECn Forex brokers directly relay the trades to the liquidity provider
  • Prices can be highly volatile, this making ECN forex brokers a preferred choice for forex scalpers
  • You can trade news based events and other such intraday trading methods

Disadvantages of non-dealing desk Forex Brokers

  • Due to the variable spreads, some traders might find it difficult to calculate stop loss or break even points
  • The market up can add up to additional costs you pay for trading with a non-dealing desk broker

How to identify true ECN Forex Brokers

  • True ECN forex brokers will not offer fixed spreads but rather Straight through processing.
  • True ECN forex brokers will charge a commission
  • Trading with a true ECN Forex broker requires higher deposits and do not offer micro or mini accounts.
  • True ECN forex brokers do not make use of a dealing desk

In conclusion, we should note however that while a no dealing desk broker looks better, they do have their own short comings. For example, ECN forex brokers often tend to use last look in executing the trades. The question as to whether this is good or bad, is subjective. At the end, it is up to the trader to decide if they can live with it.

Of course, not all forex brokers (ECN) make use of last look in their trading.

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