Forex companies (brokers) trade with traders using one of two trading methods.
The first is DD, also known as “dealing desk” or OTC (over the counter). Dealing desk brokers, as they are called, do not make orders directly between the trader and the liquidity providers, but rather finish a first order within the company before sending it out. In other words, traders deal first with their Forex broker, and that broker can guarantee their own profits through the gains or losses of traders. A loss for the trader is a gain for the broker, and vice versa. The merit of this system for brokers is that, although there is always a risk, it is said that about 90% of individual traders’ trades end in loss, meaning that brokers have a chance to profit almost 90% of the time. Dealing desk brokers generally provide spreads at a fixed rate and make their profits through these spreads. If the trader continues to lose, then the broker continues to win.
The second trading method is NDD, otherwise known as “no dealing desk.” NDD brokers provide direct access to the liquidity providers and the Interbank market. In an NDD trading format, there is no middle man, making trades a bit fairer and less arbitrary. Spreads are variable, so as long as the trader is winning, the broker will win too. This makes it a win-win situation for both the Forex broker and the individual trader.
NDD brokers can be either the traditional STP (straight through processing), or the recently popular ECN (electronic communications network). To put it simply, the system used up until now was a system where the broker connected the trader’s order directly with the liquidity provider, who in turn has access to the Interbank market. For the Forex company’s confidentiality’s sake, the company remains in the middle, but just does not process the order first like in a dealing desk system. On the other hand, an ECN system is one where the trader’s order does not go through the broker first, but rather skips the broker and is processed in a high-spec Interbank environment that STP cannot achieve by definition. With ECN, there are no mark-ups from Forex brokers, and the spreads are narrower. It is possible for the trader to trade in a transparent, fair environment. Furthermore, some Forex companies have judged the high-spec environment needs to have surpassed the environment of MT4 and have begun using cTrader. With cTrader, it is possible to see how many orders are being processed in any trade. In addition, there are no limits to the number of large transactions or EA scalping that a trader can execute. However, the demerit to this system of narrower spreads is that Forex company’s profits become lowered, and so they include handing fees on most transactions.
Furthermore, because transactions depend on the e-commerce office of the Interbank market, execution speed varies depending on the time zone of the office handling the order.