brokers discussions

With all the new regulation and changes going on in the Forex industry, it can be very difficult finding the right broker. In this article, I will aim to clearly outline the differences between Forex brokers and what is going to be best for your trading.

(My apologies for the length of the article, it may take up a few of the first posts)

ECN vs. Deal Desk; Which is right for you?


The popular debate between ECN and dealing desk brokers has been going on for quite some time now and there will soon be a clean dividing line.

The age old question still remains: Which type of broker is better for retail FX traders; a clearing firm that passes on all orders (ECN) or a traditional dealing desk? And, what exactly are the pros and cons of each?

Due to the generational events in the global economic markets within the last 18 months, the Foreign Exchange market has changed, and drastically at that. A few of the more notable events that have heavily impacted the spot FX markets include the demise of two of the largest interbank dealers (AIG and Lehman Brothers) which has played a role in the decreased available credit for many of the remaining firms. Additionally, and even more specific to the non-institutional trader, the NFA (National Futures Association) continues to pass increasingly tough regulation on all NFA member firms.

This informational FX update aims to explain the differences between clearing firms that pass through all client orders (ECN or STP models) and traditional Dealing Desks, and help traders decide which type of broker is the best choice for themselves.

Important Terms to Know:

ECN – Electronic Communication Network. Often referred to in financial markets as a platform where buyers and sellers can connect anonymously. An electronic market where the “price” of the underlying item is either the lowest offer where a platform participant can buy from another participant or the highest bid where a platform participant can sell to another participant. The more buyers and sellers on any given ECN, the better pricing one can expect.

With an ECN, your broker is NOT the counterparty to your trades. Orders are passed along to multiple liquidity providers (in most cases) or are paired with fit counterparties (other traders).

FDM – Forex Dealer Member. A National Futures Association name for a member firm that holds client deposits and executes trading orders for clients. Referred to as a clearing firm.

IB – Introducing Broker. An NFA member firm that introduces clients to a clearing firm. Introducing Brokers act as a consultant to clients offering services and information that clearing firms traditionally do not offer. Additionally, an established IB can offer insight to the industry and provide a certain level of clout when it comes to dealing with FDMs.

Dealing Desk – A clearing firm that acts as counterparty to client orders. The dealers on the desk execute client orders and are responsible for using that client order flow to generate revenue for the clearing firm. Dealers can choose to cover their risk by entering into offsetting transactions with other firms, or keep their risk exposed by choosing not to cover positions given to the desk by client orders.