Retail online foreign exchange trading business has become popular since 2000, mainly composed of many foreign exchange brokers around the world. In the ecosystem of this industry, there are different trading models, and these models have unique terms. The most common ones are DD, NDD, MM, STP and ECN.
Foreign exchange brokers mainly operate online trading platforms, and the trading models of the platforms can be divided into two categories:
There are Dealing Desk (DD) and No Dealing Desk (NDD).
In addition, the Dealing Desk is also called the Market Maker (MM). The No Dealing Desk model is further divided into Straight Through Processing (STP) or Electronic Communications Network (ECN).
There are trading platforms and market maker models, which mainly provide liquidity in the foreign exchange market. Even when trading is not active, brokers can still create prices for market participants to buy and sell while retaining profits, becoming the counterparty of traders. The prices seen and traded by traders are not necessarily the real market prices, but due to the fierce competition in the over-the-counter transactions in the foreign exchange market, the transaction prices of such transactions are generally very close to the market prices.
The No Dealing Desk model mainly connects market liquidity, allowing traders' orders to be matched with banks, other brokers, and liquidity providers, so this type of foreign exchange broker will not be the counterparty of the trader. Since the trading scale of general retail individual traders is not large, they need to use the broker platform as a bridge, otherwise they cannot trade directly in the interbank foreign exchange market. The NDD model is divided into two types: STP and ECN.
Straight-through processing means that the trader's order will be directly transmitted to the bank, other brokers or other quoters in the market, and the brokers will not intervene. This is what straight-through processing means. STP brokers can connect to several liquidity providers behind the scenes, and traders can see the real-time market price and execute the order immediately.
Electronic Communication Network refers to a system, an electronic trading network that can match transactions, which is composed of retail foreign exchange traders, institutional investors, banks, hedge funds and brokers, etc., allowing all participants to trade with each other and match orders. Traders place orders through the ECN system provided by brokers, which will be sent directly and anonymously to the market, and will be matched in the most optimized and fair manner at the highly competitive real market price at that time.
Since there is a certain degree of conflict of interest between DD or MM models and traders, many traders prefer to choose NDD, that is, STP or ECN model foreign exchange trading platforms. It should be noted that no matter which trading model is used, it does not necessarily mean whether the foreign exchange trading platform is formal. Even brokers operating in DD or MM models can operate their retail business legally and in compliance with regulations.
Further reading:
Detailed explanation of the difference between DD and NDD trading modes
Detailed explanation of the difference between STP and ECN accounts
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.