Which is Better When Trading Forex, STP or DD? – This Is Why It’s Hard to Say
It is often assumed that any forex broker which is market maker, often referred to as dealing desk broker, is never a good choice for traders while STP brokers are always the best option. Our standpoint is that such a statement is highly subjective. Consider the fact that STP brokers have several drawbacks to their execution models, which all traders must recognize.
What is best for one trader may not be ideal for another. In essence, the profile of the trader is highly unique in nature as each individual has their own wants and needs. Due to these differences in perception, we wanted to provide a very basic outline of the major limitations and advantages of each execution model: STP also known as NDD vs. Market Making / Dealing Desk execution models.
Advantages of Trading with an STP / NDD Forex Broker
- Anonymous Trading / No Conflict of Interest – One of the most attractive features offered by STP brokers is the fact that all risk, ie order flow, is passed on to the broker’s liquidity provider. From the trader’s perspective there is no perceived conflict of interest as the broker takes on no risk of their own.
- More Competitive Spreads – Because NDD forex brokers are only able to generate revenue from trading volume, they often incentivize high volume clients with more favorable spreads. Furthermore, due to the competitive nature of the forex industry, spreads have gone down as more and more brokers have entered the marketplace.
- A Better Model for EAs and Short Term Trading Strategies – Short term trading strategies and EAs are better suited for STP brokers as the potential risk involved isn’t a concern of the broker. Most likely these type of traders end up with an STP broker anyway as they generally are not welcome by dealing desk brokerages.
Disadvantages of Straight Through Processing (STP) Forex Brokers
- Slippage & Challenges Around News Events – The term slippage refers to an order being executed at a worse price than what was requested. This is more common for STP brokers since all orders are based off the current liquidity available in the market. Trading with NDD brokers can be especially difficult during news announcements as liquidity is often very low during these times periods.
- Widening Spreads – Illiquid market periods such as news events or off hours trading often result in spreads widening, a common complaint from those who trade with STP brokers. On the other hand, Market Makers / Dealing Desk forex brokers don’t have this problem.
- Overall Execution Difficulties – Because liquidity is based off of the current supply and demand in the market, sometimes a trader’s order will be outright rejected. This tends to happen less with forex brokers operating dealing desks since the risk is handled internally.
- Limited Leverage – In almost all cases, it’s impossible for STP brokers to offer leverage in excess of 100:1. The simple reason that STP brokers cannot offer higher leverage to their clients is due to the fact that the liquidity providers the FX broker has partnered with do not offer such levels themselves. As a warning, any forex broker that claims to be an STP / NDD broker yet can offer 500:1 is outright lying to you.
Advantages of Trading with a Dealing Desk / Market Making Forex Broker
- Better Order Execution & Less Slippage – Because the broker is directly making a market from your orders, in most cases the execution will be instantaneous with no slippage. Many traders perceive instant execution as an advantage, especially around news events or economic announcements.
- Fixed Spreads – Traders who are overly concerned about spreads widening out during news events or other market conditions generally don’t need to worry about this phenomenon when trading with a forex broker that is a market maker.
- Deposit Bonuses, Give Aways, and Other Freebies – Many traders enjoy the perks offered to them by dealing desk brokers, such as deposit bonuses or other giveaways often contingent upon trading a certain volume in a fixed period of time. Most of these offers are prohibited by regulated brokers or simply not possible due to the different margins an STP broker generates.
- More Leverage – Because the broker is making a market, they are more flexible when it comes to leverage. It’s not uncommon for dealing desk brokers to offer leverage as high as 500:1 or in extreme cases 1000:1. We don’t recommend ever using so much leverage but if the demand is there, then some brokers will attempt to meet it.
Disadvantages of Trading with Market Maker / Dealing Desk Forex Brokerages
- Order Rejection on Short Term Strategies & EAs – If you are running an algorithm that executes multiple trades on a short term basis, or have an ultra short term trading strategy, you may run into difficulty trading with a market making broker.
- Conflict of Interest – One of the biggest complaints concerning market making brokers is the conflict of interest. Although its true that market makers are doing just that, making a market, it’s important to note that market making is happening with STP brokers, too. The main difference is that the liquidity provider working with the STP broker is the one making the market, not the STP brokers itself.
- Reputation & Regulation – Most, but not all, of the unregulated forex brokers operate on a market making model, giving dealing desk forex brokers a bad reputation. Furthermore, traders who classify themselves as professional or high net worth are most likely better off trading with a regulated, STP brokerage.
Atomiq Consulting – Consultation Services for the Online Forex Trading Industry
If you are new to trading forex and searching for a reliable and reputable forex broker to trade with, Atomiq Consulting is more than happy to assist you further. Due to our decades of experience in the foreign exchange market and deep network of brokers we have partnered with, Atomiq Consulting is the ideal consultant to help you find a reputable broker to trade with.
To learn more about our services, ask a simple question, or evaluate a brokerage that you are looking to trade with, don’t hesitate to contact us today!
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