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Do You Know Your Broker’s Forex Execution Mode?

May 20, 2013

It would be nice if the retail Forex brokers could clear all our trades (including micro-lots and others) with other market participants. Unfortunately, everything is not that simple in the world of foreign exchange execution when it comes to the trading orders of common people.

Of course, interbank market access is possible, but there are also market makers, dealing desks and plain bucket shops out there. In fact, you probably will not be getting interbank market access unless you are trading in really big sizes via a bank or executing your orders via a currency futures exchange. Now you are left to an ECN or a market maker. Actually, ECN broker may will probably route your orders to some market maker, but in this case, your broker is paid to choose the best market maker for you out of its liquidity providers and there is no conflict of interest.

Market makers will hedge your positions (alongside thousands of others) and will benefit from your losses. Market makers may come with a dealing desk, which works much like a manual filter on inconvenient orders. No dealing desk (NDD or STP) market maker claims direct execution of traders’ orders without any human intervention. And bucket shops are bucket shops — you are technically trading in a Forex casino with them, but as long as you do not deposit a lot and as long as it is an “honest bucket shop” (if such thing is possible) you might not care about it.

Although one of my brokers supports ECN accounts, I mostly use their NDD execution. And how about you? If you are trading through more than one broker or via more than one account type, then please choose the option that corresponds to the execution mode, which is most used in your trading:

What execution model does your broker use?

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If you have any additional comments to share about the advantages and disadvantages of particular Forex execution models, please feel free to submit them below.

One Response to “Do You Know Your Broker’s Forex Execution Mode?”

  1. David - UK Based Forex Trader

    This is actually a very important post and asks people to answer several important questions…

    Are they trading against their broker or trading against the actual market.

    Is it possible that your broker has a vested interest in seeing you lose. Etc…

    Traders really need to understand these things, thanks for posting.

    Reply

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