Analysis of the types of foreign exchange retail non-counter traders

As the name suggests, non-trading desksbrokerThey do not pass orders from clients through their own trading desks. This means they do not hedge trades with clients, but simply connect buyers and sellers.

Off-the-counter brokers act as a bridge: they build a connecting structure over areas that are difficult to access directly. Such brokers usually charge a smaller commission for trading, or adjust the bid and ask price by slightly widening the spread. For example, some platforms such asDBG ForexA similar model is also used to serve traders.

Non-OTC brokers can be either pass-through trading or electronic communication networks plus pass-through processing.

What is a pass-through processing (STP) broker?

Some brokers claim to be true electronic communication network brokers, but in reality they may simply have a pass-through processing system.

Forex brokers that use pass-through processing send clients' orders directly to liquidity providers with access to the interbank market. Non-counter pass-through brokers typically have multiple liquidity providers, each offering its own bid and ask price.

Suppose a non-counter pass-through broker has three liquidity providers. In their system, you can see three different sets of buy and sell quotes.

The system then organizes these buy and sell quotes by merit. In this example, the best buy quote is 1.3000 (hoping to sell high) and the best sell quote is 1.3001 (hoping to buy low). Therefore, the current buy/sell quote appears as 1.3000/1.

Is this the quote you saw on the trading platform?

Of course not!

Brokers don't do charity! They don't bother sorting through these quotes for free.

To compensate for their labor costs, the broker adjusts the buy and sell price slightly, usually to a fixed value. If their policy is to add 1 pip, then the quote you see on the platform will be 2999/1.3002. You will see a 3 pip spread, and the original 1 pip spread becomes 3 pips.

Therefore, when you decide to buy 100,000 units of EUR/USD at 1.3002, your order is passed through the broker to liquidity provider A or B.

If your order is accepted, liquidity provider A or B will hold 100,000 units of EUR/USD short at 1.3001 and you will hold 100,000 units of EUR/USD long at 1.3002. The broker gains 1 pip from this.

The change in the buy/ask price is also why most pass-through brokers offer different spreads. If the spreads of liquidity providers widen, they have no choice but to increase their spreads accordingly. While some pass-through brokers offer fixed spreads, most offer variable spreads.

What is an Electronic Communication Network (ECN) broker?

On the other hand, true electronic communication network brokers allow clients' mandates to interact with those of other electronic communication network participants.

Participants can include banks, retail traders, hedge funds, and even other brokers. Essentially, participants hedge trades by offering the best bid and offer prices.

Electronic communication network brokers will let clients know about "market depth". Market depth shows the buying and selling orders of other market participants. But due to the characteristics of electronic communication networks, it is difficult to raise prices, so electronic communication network brokers usually receive compensation through commissions.

What type of broker should you choose?

It's all up to you! One type of broker is not necessarily better than another, because it depends on what type of trader you are. You need to decide for yourself whether to choose the model with small spreads and commissions, or the model with large spreads and no commissions.

In general, day traders and ultra-short-term arbitrage traders prefer small spreads because it is easier to make small profits and market fluctuations can more easily offset trading costs.

Also, for swing traders and position traders, large spreads may not matter.

To help you make your decision more easily, here is a brief summary of the main differences between market makers, STP brokers, and STP + ECN brokers:

Brokers are not demons... most of them are not!

Unlike what you've read elsewhere, Forex brokers don't intend to make you lose money. They want to establish a business relationship with you, not bankrupt you! Just imagine, if you lose all your money in trading, they will also lose clients. Unless, of course, it's those black brokers who only do one-shot buying and selling.

The ideal customers of a trading desk broker are traders who break even. In other words, traders who end up neither making nor losing.

This way, brokers earn money from their clients' trades while they stay in the trading game without destroying the entire account. Essentially, brokers want their clients to continue to participate in more trades.