Basically, there are two types of forex brokers, namely brokers with Dealing Desk (DD), No Dealing Desk (NDD), and Hybrid. DD brokers are sometimes also called Market Makers, or in Indonesian jargon, Bandar Brokers.
Meanwhile, NDD brokers can be further divided into Straight Through Processing (STP), Electronic Communication Network (ECN), and combined STP/ECN brokers.
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There are also types of forex brokers based on legal legality which can be divided into two. Both are regulated brokers (Regulated Brokers) and unregulated brokers (Unregulated Brokers). Check out the full description here.
Types of DD, NDD, and Hybrid Forex Brokers
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1. Dealing Desk (Broker DD)
DD brokers earn through spreads. This DD broker can be said to create their own custom market and exchange rates for their clients. It might sound like a bit of manipulation, but it really isn’t.
They still provide sell and buy options, and it doesn’t matter which one the trader chooses later. However, if you trade with a Dealing Desk broker, then make sure you are dealing with a Dealing Desk broker that is registered (regulated) as a brokerage company and has a good reputation.
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Good regulations are USA NFA/CFTC, UK FCA, Australia ASIC. Dealing Desk brokers are often referred to as dealers.
The advantages of DD brokers usually lie in the facilities they offer, such as high leverage up to 1:1000, interest-free, small spreads (sometimes fixed spreads), attractive bonuses, to the possibility of easy deposits and withdrawals through third parties.
However, the drawback is that because this broker is a Market Maker aka a dealer, the real trader does not see the real forex rate that occurs in the interbank market. In addition, both large and small dealers also often take positions that are opposite to those of traders.
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For example, you open a long EUR/USD position of 1 standard lot. To fulfill that order, the DD broker will first try to find sell orders in the same pair and size from other traders. In this way, they minimize risk.
However, if there are no other matching orders, then they will open a position opposite yours.
Each forex broker can have different risk management policies, so even if you know a broker is DD, to be sure you can first ask the broker about whether they do this or not.
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2. Broker Non-Dealing Desk
NDD broker literally means ‘without going through the dealing desk’. This type of forex broker is really a ‘bridge’ between traders and the interbank market.
Spreads at NDD brokers cannot be fixed because they must always adjust to market prices, and are usually larger than DD broker spreads.
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If they don’t set a spread, they can also charge the trader a discounted commission per lot. NDD brokers generally do not trade against the trader’s position.
There are generally two types of NDD brokers, namely ECN and STP.
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STP Broker Type
Forex brokers with STP systems transfer orders from traders to their liquidity providers who have access to the interbank market.
STP brokers usually have several banks/financial institutions as liquidity providers, and each can have different bid/ask quotes.
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For example, an STP broker has three liquidity providers, each with a different rate, then at one time the system will sort the best rate and then channel it to your platform.
STP brokers usually benefit from the spreads that are charged on every trade a trader makes. This spread is added to the price rate provided by the liquidity provider earlier. Therefore, spreads at STP brokers are usually variable spreads/floating spreads, not fixed.
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Types of ECN Brokers
ECN brokers allow their clients to interact directly with participants in the Electronic Communication Network market, including banks, hedge funds, other brokers, and other traders.
Traders at ECN brokers can also sometimes see ‘Depth of Market’, or buy and sell orders from other market participants.
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Because of this system, ECN brokers usually demand a large deposit of funds and charge a commission per lot traded.
3. Hybrid Brokers
This broker is a combination of the type of ECN/STP broker with a Dealing Desk broker. Generally, Hybrid brokers have a rule in throwing orders or based on the type of account used.
One thing to note here is that some brokers who claim to be STP/ECN may actually use a hybrid model.
Cent accounts or mini accounts that offer orders with lots of 0.1 or lower, usually cannot be sent to liquidity providers or to the market because they are too small, so they are executed on a DD (Dealing Desk) basis.
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If there is an order with a larger volume, then they will run it according to the STP/ECN model.
Actually, it is difficult to know whether a broker is a Hybrid type or not. You can only know this by trying it yourself.
Types of Regulated and Unregulated Forex Brokers
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To provide a legal basis and provide security guarantees for traders, many countries have certain regulators to regulate forex brokers. In Indonesia, this regulatory function is carried out by CoFTRA. In other countries, there are similar regulators.
Regarding regulation, forex brokers are generally divided into regulated and unregulated brokers. However, even among regulated brokers, there are quality differences between each other.
This is because there are differences between each regulator regarding whether or not there is strict supervision and guarantee for traders.
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Which regulators are good?
1. Elite Class Regulator
The ones who are known to be strict and do their job well, let’s call them elite class regulators, are the United States NFA/CFTC, Germany’s BaFIN, Swiss FINMA, and Japan’s JFSA, followed by the UK’s FCA and Australia’s ASIC.
The advantage of a regulated broker is the guarantee of the safety of your funds. Brokers with as strict regulation as the United States NFA/CFTC must meet stringent requirements and are regularly monitored by the authorities, making it less likely for them to cheat or steal their clients’ funds.
Even if the brokers later went bankrupt and went out of business, regulations have provided a system that allows all or part of the client’s funds to be returned.
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2. Mid-Range Regulator
Middle-class regulators include FMA/FSP New Zealand as well as regulators in the Euro area.
In the Euro Zone, the MiFID law applies like a ‘passport’, so that a broker who is already regulated in a Euro member state, then his license can also be used in other Euro member countries. Including regulators in the Eurozone are AMF France, CONSOB Italy, MFSA Malta, CySEC Cyprus, and others.
In brokers with middle-class regulations, the requirements and monitoring carried out by regulators are relatively looser. However, the security guarantee is not sufficient.
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An example of a case is the mass bankruptcy of several forex brokers in early 2015. At that time, several UK FCA-regulated brokers and New Zealand FSP became victims.
One year later, clients of UK FCA-regulated brokers have been able to request a refund of some of their funds (some of them cannot be returned because the broker’s funds supply has run out), but there has been no news from FSP New Zealand.
In other words, a license from a middle-class regulator guarantees the existence of a broker, that the broker is not a fake forex broker. However, the security of funds is lacking.
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3. Offshore Regulator
The MFSA of Malta and CySEC of Cyprus are often considered to be the least regulated compared to the other regulators mentioned above. In addition, there are other examples such as FSC Gibraltar.
However, there are still much more lax ones, namely regulators in offshore areas such as Belize, St Vincent, and the Grenadines, the Seychelles, the British Virgin Islands, and so on.
Even if a broker says he holds regulations, but if it is located in these places, then it can be considered the same as being unregulated.
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It can be said that offshore licensed forex brokers can only guarantee the existence of the company because monitoring from regulators is generally very, very loose.
If the broker goes bankrupt or runs away from the client’s funds, there is no guarantee at all that the client’s money will be returned.
Meanwhile, forex brokers without a license should be questioned about the real existence of the company, especially if they do not provide a clear address.
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However, there are also many countries that originally did not have regulations or regulators regarding forex, such as Montenegro and Russia.
It was only at the end of 2014 that Russia enacted a forex law, but until early 2016 it was not yet effective, so generally, Russian brokers were not regulated.
While in Canada, each region (‘province’) has its own regulator, so the regulations nationally are somewhat ambiguous.
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Well, are you going to use a regulated broker or not? It’s all up to you. Unregulated brokers are usually lighter on registration, deposit, and withdrawal requirements, but their safety and sustainability are questionable.
While registration, deposit, and withdrawal of brokers with bona fide regulations are usually complicated because they are related to anti-money laundering laws, clients will get extra security guarantees.
Especially for Indonesia, forex brokerage operations are under the supervision of the BAPPEBTI regulator (Commodity Futures Trading Supervisory Agency). You can see some examples of legal brokers who have obtained BAPPEBTI permits in the Best Local Brokers List.
