Technologies of execution of trades in the Forex market
One of the guarantees of success in the Forex market is the quality of services provided by the broker. One of the most important factors directly influencing the opening and closing of a trader’s position is the technology of execution of trading operations by a broker. It is this factor that determines the speed and accuracy of execution of trade orders given to the broker, which, in turn, significantly affects the profitability of trading trader.
The classic method of execution of clients’ trading orders in the Russian Federation is the so-called Dealing Desk (DD), when the broker acts as a counterpart for clients’ transactions and as a market maker. The only advantage of this scheme of transactions execution for a trader is the possibility of trading with a minimum deposit, because the requirements for the minimum volume of transactions are set by the broker. When using this scheme of work, the broker overrides the cross orders of its clients, and for orders that do not have a control order, acts as a counterpart. Thus, when using the DealingDesk technology, there is almost always a conflict of interest, because only one of the parties to the transaction – either a trader or a broker – will get profit.
Using Dealing Desk technology, a broker can easily monitor all the operations of his clients, and then divide them into groups according to the principle of profitability of trading. After that, the broker is quite able to apply various technical means, which worsen the possibility of a successful trader to make a profit, for example, significantly increasing the time of execution of trades with the corresponding permanent requotes. In this case, the trader simply can not open the deal, and even if the order eventually opens, the opening price will be at a considerable distance from the initial quote, profitable for the trader. These technical capabilities are not always used by brokers, but it should be understood that they are present and can be used.
Another method of executing trading orders that has rapidly gained popularity among traders is Non Dealing Desk (NDD), i.e. execution of transactions directly without the participation of a broker. This scheme of transaction execution requires traders to make a higher deposit, as the broker does not conduct internal clearing, but sends transactions directly to the liquidity provider. The broker automatically provides quotes to the trader and sends trade orders, for which certain commissions are charged, the amount of which is the total earnings of the broker. The main advantage of this system is the absence of requotes, i.e. trader’s trade orders are executed at the current market price, regardless of its possible changes. In this case, the order opening price may be worse or better than the current market price, but it eliminates serious time delays of opening a position, which can significantly affect the profitability of trading trader.
NDD accounts have the following advantages:
- reducing floating spreads to almost zero;
- high speed of execution of trade orders;
- direct access to a liquidity provider.
There are 2 special cases of NDD technology implementation – STP and ECN.
STP (Straight Through Processing), or through processing of transactions – technology of direct transfer of a trader’s order for execution to a liquidity provider. In this case, brokers act as intermediaries between their clients and banks in exchange for a small spread premium. Thus, the broker earns only on the spread, which excludes the conflict of interests, which is the root cause of various manipulations. The broker can also broadcast direct bank quotes, but in this case he charges commissions from the trader for each executed trade.
ECN (Electronic Communication Network) is a system for organizing the execution of transactions, when trade orders are executed not through intermediary banks, but directly between market participants. In this case, the trader places his request to buy or sell to the ECN-site and in case if the other trader places a counter order suitable for the parameters, the orders of both traders will be executed. In this case, each trader can evaluate the “depth of the market”, that is, view detailed information about the orders placed by other traders in the so-called “glass”. This makes it possible to determine the existing liquidity in the market and to make balanced trading decisions based on the information obtained.
When opening a trading account with a broker, a trader usually has the opportunity to choose the method of execution of trading orders, which he will use when carrying out trading operations. With sufficient capital, NonDealingDesk is preferable, as the conflict of interest for this type of account is minimized, which provides some assurance of the broker’s integrity. However, the risk of manipulation is not completely eliminated, so it is necessary to conduct a comprehensive analysis of the broker before opening a real trading account.