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STP, NDD, ECN — WTF?!

November 15, 2011 by Andriy Moraru

Even experienced traders often get confused with various Forex terms. STP, NDD and ECN are very important acronyms and are popular in brokers’ lexicon. The term “market maker”, in spite of not being an acronym, is closely related to those three and is used to describe Forex brokers. Unfortunately, the definitions of these terms are quite vague and you may find rather contradictory versions online. Here, I try to provide a better explanation of their meaning to a Forex trader:

Market Maker — a broker that holds positions in the asset, for which he is offering trading services. For example, if you open EUR/USD Buy position with a Market Maker, it will open a mirroring EUR/USD Sell position in its liquidity market, keeping the spread difference between your Buy price and his Sell price as a premium. The majority of Forex brokers are Market Makers.

What does trading with Market Maker mean to you as a trader? Since broker is opening a position in an opposite direction, there’s a conflict of interest that may become a cause for the fraudulent manipulations, but that doesn’t necessarily mean that all Market Makers are fraudulent. Market Maker brokers may charge any spread difference they like — they are limited only with the level of the industry competition. Trade execution is slower, since broker needs to open two positions in its books.

NDD or No Dealing Desk — a broker without a dealing desk. What’s a dealing desk then? Dealing desks in Forex trading are the human teams that filter the traders’ orders before they are executed by the Market Maker. Dealing desk can refuse to execute an order at the given price and send a requote to trader; they may also delay an order if the current market conditions are unfavorable for the Market Maker. No Dealing Desk means that the broker doesn’t employ such manual order-handling system.

What does it mean to a trader? Faster execution, no fake requotes, delays, slippage and order rejection. It’s generally considered a fairer type of execution.

STP or Straight Through Processing — fully electronic execution of the trades without manual intervention. It was created as the opposite to the T+3 processing in financial markets. In Forex, STP is the synonymous of NDD — both features mean that the orders will be executed electronically without manual intervention from the broker, ensuring both speed and consistency of trading.

What’s in STP to a trader? The same as with NDD — it’s faster, with less manipulation and intervention between the order and the open position.

ECN or Electronic Communication Network — a network of computers used for trading. In Forex, it means a direct access to the network of several liquidity providers. ECN brokers do not hold a mirroring position to every client’s position. They merely pass the trader’s order to the network, matching it with the best quote available from several liquidity providers. In this case, a broker doesn’t earn spread, but charges commission for order execution.

ECN results in extremely low spreads for a trader. The spread isn’t completely eliminated, since some Bid/Ask spread will exist even for the best quotes among several providers. Traders pay commission, which depends on the trading volume. With ECN, there’s a huge potential for the increased speed of execution, but, unfortunately, faster execution is not always the case, since the speed of it depends on many factors — such as the integrity of the ECN broker’s network and quality of their software.

Conclusion

The conclusion here is pretty simple. As a trader, you probably want to find an ECN broker with low commission. If you can’t find one, you should try find an STP NDD (which is virtually the same) Market Maker. Trading with Market Maker that employs dealing desk may be quite dangerous, and the Forex market is risky enough without that.

If you have any comments or questions about the STP, NDD, ECN or any other related term, please reply to this post using the form below.

4 Responses to “STP, NDD, ECN — WTF?!”

  1. Ania

    helol i want to know of fx salt is ecn broker stp or mm thank you

    Reply

    admin Reply:

    Looks like a market maker, but you’d better ask their support.

    Reply

  2. partha

    hello is this statement true ?

    STP brokers use complex algorithms that finds if a trader is successful and automatically routes those traders to the real market while small and losing traders aren’t routed to the market. This way the broker profits twice: once by clients losses and another by not losing money to successful traders. STP brokers are currently a hit and are not so long around.

    Reply

    admin Reply:

    Some (unregulated) STP brokers may do that, though I doubt that it’s technically possible to apply such filtering effectively.

    Reply

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