Types of Forex Brokers : DD - NDD - STP - ECN - Market maker - Bucket shop

Types of Forex Brokers

DD (Dealing Desk)

NDD (No Dealing Desk) 

STP (Straight-through processing)

ECN (Electronic communication network)   

Bucket shop

 

How do Forex brokers make their profits ?

DD - Dealing Desk - Forex brokers that operate through Dealing Desk (DD), typically offer fixed spreads and may elect to quote above or below actual market prices at any time. A dealing desk broker earns profit via spreads and by trading against its clients. A Dealing Desk Forex broker is called a Market Maker - they literally create a market for their clients: when traders want to sell, they buy from them, when traders want to buy, they sell to them, e.g. they will constantly take the other side of the trade and in this way "create the market". A trader doesn't see the actual market quotes, which Dealing Desk brokers (Market Makers) operate with their quotes where they need to in order to fill the client. Definition of ' No Dealing Desk' A method of trading currencies that offers immediate access to the interbank market. The interbank market is where forex is traded. This is different from trading through the dealing desks found in many banks and financial institutions. Forex brokers can balance their deals using the Dealing Desk if they are registered as Futures Commission Merchants (FCM) and Retail Foreign Exchange Dealers (RFED). Your positions are automatically offset and delivered straight to the interbank market.

NDD - No Dealing Desk - NDD Forex brokers provide access to the interbank market without transfering orders through the dealing desk. With true NDD brokers there are no re-quotes on orders and no delay during order confirmation. Which means there are no restrictions trading in high volatility market especially during economic announcements. NDDs can either charge a very small fee for their trades or simply raise their prices by slightly increasing their spreads.
No Dealing Desk brokers are either STP or ECN+STP.

STP stands for "Straight Through Processing" and it's a way for forex brokers to route their clients' orders directly to banks that trade on the interbank market. Brokers with STP systems usually have multiple banks offering their own prices, which can lead to better prices for clients. Traders can execute trades immediately without any interference from brokers, which is what makes the platform STP.

ECN stands for "Electronic Communications Network" and it's a type of forex broker that allows clients' orders to interact with orders from other participants in the network, including banks, market makers, and retail traders. Participants trade against each other by sending bids and offers into the system, and they receive the best offers available at the time. All trade orders are matched in real time between counterparties. ECN brokers usually make money by charging a commission based on trading volume.

Sometimes people talk about STP brokers like they're the same as ECN brokers. But for a broker to be a true ECN, they have to show something called the "Depth of Market" (DOM) in a data window. This allows clients to see how big their orders are in the system, and it lets other clients fill those orders. An ECN broker also lets traders see where the liquidity is and make trades based on that information

Broker types comparison and revenues: fixed vs variable spreads vs commission

When it comes to Forex brokers, there are two types: ECN and STP. ECN brokers always have variable spreads and they charge a commission for every trade. They make their profit only through commission and don't make money from the difference in prices.

STP brokers, on the other hand, can have either fixed or variable spreads. They send trading orders to banks and act as a middleman between their clients and the banks. Banks usually offer fixed spreads, so an STP broker can either keep the spreads fixed for their clients or float them starting at 0 and let the system choose the best bid and ask from the number of banks available.

An STP broker makes money by adding a small markup to the spread quote. They don't trade against their clients, but instead add 1 pip (or a fraction of a pip) to the best bid and subtract 1 pip from the best ask provided by the banks. All client orders are directly sent to the banks, while the STP broker earns their profit from their markups.

A market maker broker is a type of broker that earns money by charging a higher price when traders buy and paying a lower price when traders sell, which is called the spread. Market makers also make money when traders lose trades. This is because market makers trade against their clients by making a trade that's the opposite of what the client wants to do, which is called hedging.

Conclusion:

ECN brokers are the most honest type of Forex brokers, as they only make money from commission and want their traders to make consistent profits. On the other hand, STP brokers make money from spreads and still provide advanced trading services to their clients. They also want their clients to be profitable, so they can keep earning on spreads. Finally, market makers make money from spreads and by trading against their clients. However, if a client becomes too profitable, it may cause problems for the broker, as their revenue also comes from clients' losing trades. Therefore, smaller market makers may ask these clients to leave, while larger and reputable ones can handle the situation more professionally.

Benefits of trading with No Dealing Desk brokers

Traders prefer No Dealing Desk brokers because they offer transparency, faster and better trading, and anonymity. When trading with NDD brokers, traders enter the true market, not an artificial one created by the broker. This allows for competitive market bids and offers, resulting in better fills. With anonymity, there is no monitoring of clients by a Dealing Desk, and orders are executed automatically through the market network.

On the other hand, Dealing Desk brokers can profile their clients and trade against them. Less successful clients may be put on auto-execution, while successful clients may experience frequent re-quotes, slippage, and slower execution. The transparency of a Dealing Desk broker depends on the rules inside the company.

Overall, Forex brokers are not bad, whether they have a Dealing Desk or not. They aim to make business, not just work for traders. Large Forex brokers may try to help their clients become profitable, but ultimately, it's up to the individual trader to succeed in the market.

Some visual example

Source : 100forexbrokers.com

Source: forex-central.net

Bucket Shop
In the stock market, there are some bad brokers called "bucket shops" who use tricks to cheat their clients. They lie about buying shares for you and just pretend to do it. They are like a bookie who takes your bets on the price of stocks changing. Some people think all market maker brokers are bucket shops, but that's not always true. Bucket shops are worse because they do things to make you lose money. Forex bucket shops are brokers that use shady practices like lying about prices or making trades that only benefit themselves. They care more about making money than helping their clients. They used to keep client orders in a bucket instead of really doing the trade, but now they use the internet to trick people. It's important to be careful and avoid these bad brokers. You can look at reviews from other traders to find good ones.
So, before you deposit your money with just anyone, make sure to do your due diligence and espionage so that you avoid fraudulent brokers and forex scams. Mind you, there are plenty out there and we’ll look more into that later on!

Common tricks that bucketshops use - 

- Price lag 

- Manipulating quote (including placing orders on non-existence price)

- Slippage 

- Constant requote

- Price spike

- Slow execution

- Stop hunting

 Here are some clue for you :-
EXAMPLE 1 - Price quote manipulation
This is the price on other brokers

This is the price on bucketshop broker. 2-3 pips difference is normal, but this broker had 15 pips diference from other brokers:-

EXAMPLE 2 - FAKE CHARTS

EXAMPLE 3 - RIDICULOUS SPIKE

There are more examples, want to see more? google it.

Conclusion? BEWARE OF BUCKETSHOP SCAM !

Other useful link :-
How the retail Forex works. Dealers vs. Clients



Risk Disclaimer
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.