Choosing the Right Broker is of utmost importance
The type of broker you choose is a critical decision, which will have a profound impact on your potential success. Should you choose a dealing desk broker, or a no dealing desk broker? It is a straightforward choice and question, and one we will answer immediately. Serious, committed traders, who have developed a professional outlook and approach, should only choose the ECN/STP trading model every time and we will outline some of the reasons why.
Firstly, the majority of FX traders are day traders or scalpers - whose trades can last from seconds, minutes, or hours these FX traders rarely hold FX trades overnight. Therefore it should be a simple decision to decide whether you would rather have tighter spreads, but pay a commission per trade with an ECN/STP broker, versus wider spreads and (theoretically) pay no commissions.
Dealing desk traders "make the market", their own market. They are at liberty to quote their own synthetic price (depending on a list of their variable conditions) which could include how thin their liquidity is, based on the volume of business they are conducting on behalf of their customers. Therefore their quotes are artificial quotes.
Dealing desk spreads are often fxed, which can appear attractive if they are quoting a fixed spread of, for example, one pip on EUR/USD. However, traders may experience slippage and poor fills, meaning that the reality is they are being filled so far from the true market price that the spread is closer to two, or three pips per transaction. The dealing desk broker can also delay filling the order in an attempt to get the best price for the broker.
However, by far the biggest difference between dealing desk brokers and ECN/STP brokers is the fact the dealing desk brokers in effect bet against their customers. If the dealing desk client wins then the broker loses, they are effectively betting against the client. Now whilst an argument could be put forward that with huge volumes the dealing desk broker is neutral in terms of the outcome, the fact remains that a dealing desk broker is taking a position looking to profit if the client loses.
With an ECN/STP model the spreads are variable, depending on the true market conditions at any given time and the quotes provided by the liquidity providers; consisting of major banks and institutions who contribute to the electronic configured network. Traders pay a small transaction fee per trade and there is generally no commissions charged. With the ECN/STP broker they become a bridge, a conduit between the trader and the market. The trader gets straight through to the market via the electronic configured market place with no barrier, no interference and no intervention. The prices come from the network, a liquidity pool created by the contributors.
With the ECN/STP model there is never any re-quotes, all orders are filled at the best possible price at any given time. Occasionally these quotes can be incredibly good value, as low as a small percentage of a pip, perhaps 0.1 depending on the volume of activity within the ECN and that brings us to another key benefit of trading via an ECN/STP broker; the depth of market.
