What is a No Dealing Desk Broker?

Introduction

There is a wide variety of brokers to choose from while engaging in foreign exchange trading. No-Dealing-Desk (NDD) brokers are one subset of this industry. To avoid the middleman, clients of NDD brokers can trade on the interbank foreign exchange market directly. NDD brokers provide forex traders with better bid and ask pricing because they collaborate with banks and other significant market players. Depending on the NDD broker, you may have to pay a spread, a commission, or both to make trades.

NDD brokers don’t intervene between their clients and the interbank rates. Traders may benefit from having direct access to interbank rates, but it could also have negative consequences. When working with an NDD broker, traders may rest easy knowing that their broker is not biased against them. Orders placed with brokers using the “No Dealing Desk” approach are often filled without human intervention.

 

What is a No Dealing Desk Broker?

Forex broker who use this system, collaborate directly with market liquidity providers. When trading through an NDD, instead of dealing with one liquidity provider, an investor is dealing with several providers to achieve the most competitive bid and ask pricing. This strategy gives an investor access to rates that can be executed immediately.

Many investors like NDDs because of the added transparency they provide. Many investors believe the broker provides more trustworthy service than a retail forex company because it does not operate as a middleman. If the trader’s bank issues a note promising to pay if the trade goes south, some ECNs will even allow the trader keep the funds in their own bank account. This makes using an NDD broker more comforting for some investors.

Both the size of the currency rate differential and the cost to make a trade increase when dealing with the interbank market directly. The spread offered to retail consumers on the interbank market is what traders see when using an NDD broker. Spreads offered by NDD brokers may be larger than those offered by dealing-desk brokers, depending on the currency pair being traded and the dealing-desk broker being compared. As a result, the expense of making a trade rises.

NDD brokers may also tack on exchange fees or commissions to the initial trade. Because they are passing the spread on to the customer, they will need to implement some sort of pricing structure or risk losing money on the service. These two factors may cause trading with an NDD broker to cost more than dealing-desk brokers in the long run.

There are two main types of No Dealing Desk brokers. They are called Straight Through Processing (STP) or Electronic Communications Network (ECN).

STP (Straight Through Processing)

STP acts as a liaison between the trader and other brokers. In most cases, STP will pass the order on to a large brokerage or ECN brokers to fulfil. STP brokers connect buyers and sellers directly with market-moving liquidity providers like banks. When trading with STPs or retail FX businesses, you face up against banks and brokers.

ECN (Electronic Communication Network)

In order to trade on an ECN platform, traders must take part in the underlying market. The experience teaches them about commerce and social interaction. Financial institutions, government bodies, and other organisations and individuals all take part. Trading occurs in real time without the need for a central marketplace or dealing desk.

Brokers are aware of market conditions because they are familiar with both the seller and the buyer. Commissions and spreads are the main sources of profit for brokers.

However, ECN mandates that traders not hedge, keep leverage low, and adhere to FIFO’s few regulations. In addition, the trader will be charged a commission fee. However, the spread will work in the trader’s favour. The NDD option is there in case the trader has trouble adjusting to the ECN.

ECN brokers do all the same things which STP brokers do, except that they additionally allow their clients to trade directly with each other.

 

No Dealing Desk Broker vs. Dealing Desk Broker

A No Dealing Desk broker stands in contrast to Dealing Desk Brokers or Market-making Brokers who aim to stand in between consumers and the interbank market as a method of making trades quicker and more efficient. This requires them to gamble that they can correctly predict future market movements.

Their goal is to attract retail traders by offering attractive terms and conditions, including ease of use and low transaction costs. Instead of helping a trader who is dealing directly with the interbank market, these intermediaries create a market by offering transactions at rates that may be the same as or even lower than the rate at which the interbank market is trading. In this kind of deal, the retail merchant saves money. The spread is entirely retained by the broker, to their benefit.

The ability to execute trades is made possible by the liquidity provided by Dealing Desk (DD) brokers. Brokers that take the other side of a client’s trades establish the asking and bidding prices and wait for the trader to place an order based on those conditions. The DD broker makes money by taking advantage of the difference in price between the bid and the ask, as well as by purchasing at low and selling at high.

If you trade successfully using the DD broker’s execution model, you will receive compensation from the broker. Your broker benefits from the money you lose trading. This means that instead of sending your order to the actual interbank market, you are trading against your broker. DD brokers have a bias against their customers because they don’t share their liquidity with the genuine forex market but instead hold their orders in-house.

The problem is that dealing-desk brokers create a market by frequently taking the other side of trades, which puts them in direct opposition to their clients’ best interests. Assuming they are skilled at giving such pricing and do not deviate from the interbank rates, they and their clients will gain from this business model. Although this may sound simple, improper business practises on the part of some dealing-desk brokers have necessitated regulatory scrutiny.

Some say that this can lead to a conflict of interest, as there are dealing desks that might fill your orders on a discretionary basis depending on whether or not their own opposing position could turn out profitable for them, but this isn’t always the case.

Market makers should ideally be unconcerned with the success or failure of the positions they fill for customers, sticking to the bid and ask prices they quote.

Before accepting a countertrade or passing it on to a liquidity provider—often a large organisation that can readily purchase or sell a financial asset—dealing desk brokers would typically try to obtain a matching long or short order from another client.

By taking the spread rather than the other side of the client’s deal, they reduce their exposure to risk.

 

Which is the best kind of Broker?

It’s not always the case that one type of forex broker is superior to another. You can go with a dealing desk broker for tighter fixed spreads, or you can go with a no dealing desk forex broker and pay a commission on variable spreads per trade.

Day traders and scalpers choose tighter spreads because it allows them to take smaller profits with less market movement required to overcome transaction expenses. They decided on a broker with a dealing desk. Long-term swing and position forex traders frequently prefer No Dealing Desk forex brokers since the wider spreads are negligible to them.

Choosing the proper forex broker boils down to your trading style and the type of trader you are. A lot of consumers are terrified of market manipulation and struggle with the idea of trading against their forex broker. However, most market makers no longer manipulate prices, therefore trading forex is rather safe in recent years due to increased regulation of the forex industry. These dealing desk brokers instead conduct all forex transactions internally, based on the assumption that most traders quickly lose money in this market.

 

Advantages of a No Dealing Desk

Transparency is one of the first and greatest advantage. More information about the underlying market dynamics is available with a no dealing desk arrangement because trades are done directly with liquidity providers. Traders can use this information to better gauge when to purchase and sell currencies.

There is no conflict of interest since the broker is not acting as the counterparty to the trade. This means that traders can be confident that their trades are being executed fairly.

With a no dealing desk model, spreads are typically tighter than with a dealing desk model. This is because the broker is not adding their own mark-up to the spread, and is instead passing on the actual market spread.

 

Disadvantages of a no dealing desk

When using a model that does not involve a trading desk, there is a possibility that liquidity will be restricted, particularly during periods of extreme volatility. This may lead to delays in the execution of trades, and in rare instances, it may even make it impossible to execute trades at all.

Spreads are often changeable in a model that does not use a dealing desk. This implies that traders may not be aware of the precise amount of money that they will have to spend in transaction fees. Because of this, it may be difficult to arrive at an exact estimate of possible earnings and losses.

Because the broker is not responsible for completing the client’s request, there is no assurance that trades will be carried out. Consequently, there is a greater possibility that trades will not be carried out during periods of extreme volatility as a result of this.

Pros and Cons of a No Dealing Desk Broker

PROS

Deep liquidity

Transparency

Fast execution

No re-quotes

An alignment of broker and trader interest

CONS

Limited liquidity

Spreads are variable

No guaranteed execution

Conclusion

There are two main categories of foreign exchange brokers to consider: dealing desk brokers and no dealing desk forex brokers. Brokers at a dealing desk often go against the trades of their clients. If a trader in forex goes long, the broker must short.

Forex brokers with no trading desk do little more than act as middlemen, routing their clients’ trades to larger liquidity providers or interbank markets. Through these, traders deal directly with the interbank market. Brokers who operate out of a dealing desk profit off their clients’ spreads and trader losses. Brokers that don’t have a “dealing desk” make money through commissions and spreads.