6 Types of Forex Brokers: DD, NDD, Hybrid, STP, ECN or Regulated?

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.

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!

Also read: What is a Forex Broker? This is the Definition and Regulations!

Types of DD, NDD and Hybrid Forex Brokers

types of forex brokers

1. Dealing Desk (DD Broker)

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.

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.

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.

There are two types of Dealer Brokers:

– Big Dealer

This type of broker usually has a good reputation and is legally registered (regulated), as well as not located in a remote or obscure place.

Just like you play in a casino, you should look for a big casino like Macau or Las Vegas. Because if you get a profit, it is certain that the broker can pay your winnings, and your investment savings will remain safe.

In this regulated DD broker there is a supervisory body (generally from the local government) that aims to control or ensure that the broker has done its job well and does not deceive customers.

– Small Dealer or Unregulated Broker (Bucket Shop or street broker)

This type of broker is a broker that you should avoid, because they have great potential to manipulate transactions or act fraudulently, so you will easily experience losses that should not happen.

Generally, Bucket Shop brokers are not licensed properly, and are only licensed as ordinary companies or others (not as brokerage companies). This often deceives prospective customers who are still beginner.

Bucket Shop Broker Features:

  • Located in unclear places or only having a license from an unknown offshore country.
  • Most definitely allow money transfers with third parties or individuals.
  • Registration is very easy and seems careless and without adequate verification.
  • A number of these city brokers set limits or prohibit certain trading techniques (such as scalping, martingale and so on). However, there is also a Bucket Shop that allows all kinds of trading techniques because the system actually has an automatic script installed that can hinder these techniques (the script is usually called Virtual Dealer).
  • The conditions offered by Bucket Shop brokers are often outside the normal conditions of real market conditions, such as too high leverage (eg 1:1000), unreasonably low spreads (eg 1 pip fixed even 0 pip fixed, even though in the real market Spread is always changing every second).
  • There are big bonuses whose purpose is to attract customers to want to place their funds (which in the end is to be ‘eaten’ by the fraudulent bookie). Be careful with brokers who offer things that are too bombastic or bonuses that look very attractive, because the bigger the bonus, the more careful you need to be careful. Instead of being trapped later and you will experience losses that are not comparable to the bonuses offered.

Cheating things that are usually done by Bucket Shop type brokers are:

  • Excessive requotes. A requote is when you want to make a transaction at a certain price, but the platform instead proposes a different price option.
  • Slow order execution; If it is hit by TP (Target Profit) it is difficult to execute, but if it is hit by SL (Stop Loss) it is very easy to execute.
  • Servers are often down. If the server has a problem, then of course we can’t trade. It could be, we can’t even close a trading position that has been opened.
  • Manipulation of quote prices.
  • Do not want to admit profit transactions unilaterally on the pretext that your trading is not valid.
  • Withdrawals are often held back or cannot be done.
  • Incorrect statement. Be careful with statements from Bucket Shop brokers who often give false and misleading statements about their system, such as stating that they are an ECN or STP type broker. Therefore. Checking for regulations is VERY IMPORTANT that you know that the broker has been under scrutiny from a bona fide body not to cheat traders.

Also be aware of the awards they claim. The award does not guarantee the broker is safe. First, check which agency is rating the company. And search on Google about the credibility of the rating company.

Example: Prime4x’s scam forex broker also previously claimed to be ‘The Best Broker 2009′ even though the rating agency is not a credible institution, and the proof is that the broker is in fact a scam and takes customers’ money away.

Also read: 10 Rules and How to Trade Forex For Beginner Traders

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.

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.

– 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.

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.

– 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. Because of this system, ECN brokers usually demand a large deposit of funds and charge a commission per lot traded.

3. Hybrid Broker

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. 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.

Also read: 4 Knowledge and Aspects of Forex Psychology for Beginner Traders

Types of Regulated and Unregulated Forex Brokers

types of forex brokers

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.

Which regulators are good?

Also read: 9 Types of Orders in Forex Trading that Traders Should Know

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 a 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.

Also read: What is Forex Trading: Definition, Markets and Forex Basics

2. Mid-Range Regulator

Middle-class regulators which 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 Euro zone 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.

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.

Also read: 6 Times and Hours to Forex Trading: From Asian to American Session

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, Seychelles, 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.

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.

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.

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.

Also read: Hierarchy and Forex Market Structure that Traders Should Know

Which Type of Forex Broker to Choose?

types of forex brokers

Also read: History of Forex Trading: From Era of Gold to Online Trading Like Now

With so many types of forex brokers, which one should we as traders choose? Well, for that, there are a few things that should be considered. Anything?

1. Broker Regulatory Status

The regulatory status of a broker is often equated with the safety of your funds at that broker.

Thus, brokers with elite class regulations as mentioned in the previous section are brokers with the highest prestige, followed by brokers with middle class regulations, offshore regulations, and then unregulated brokers. However, each has its advantages and disadvantages.

The better the regulatory quality of a broker, the more complicated the registration, deposit, and withdrawal processes. For registration with a US broker or a broker connected to a European bank, for example, during registration, various documents may also be requested which must be sent by post to their office.

This is much different from the registration process to an offshore regulatory broker or middle class regulation which can be done completely online and can be completed in just a few minutes.

For this reason, many traders choose forex brokers with mediocre regulations rather than elite class regulations or unregulated brokers.

If you are interested in investing in the amount of tens of thousands to hundreds of thousands of US dollars, then it would be better to register with a well regulated forex broker.

However, if you only want to invest in small-medium scale, then a broker with a medium-level regulation can be more practical.

Another option that is no less important is if you are a trader who wants to ensure the legality of a broker in Indonesia. Because if so, then BAPPEBTI regulations will be your priority in choosing a broker.

Also read: Top 4 Forex Trading Risks You Must Understand, Don’t Lose!

2. Transaction Fee

No matter which broker you sign up with, there will be a transaction fee charged to your forex transactions.

There are generally two types of transaction fees: spreads and commissions. A forex broker may charge only spreads, commissions only, or both.

The spread is usually a few pips added to the current ask/bid price when a buy/sell is made.

While the commission is usually calculated in the amount of US dollars per lot traded. The amount of spreads and commissions at each broker varies, so you can adjust it to your trading style.

3. Deposit and Withdrawal Method

A good forex broker will allow you to deposit and withdraw funds as easily and quickly as possible. However, dealing with Indonesian traders who register with foreign brokers may be more complex than those who register with local brokers.

In general, there are four types of deposit and withdrawal methods from forex brokers, namely via bank transfer, credit/debit card, e-payment, and third parties.

If a bank transfer can be run through a local bank, it will be very easy; But if you have to bank wire abroad, it can take days and the bank deduction is high. The next alternative, using a credit/debit card can be done instantly, but the bank discount will also be large.

The current favorite option is with e-Payments such as PayPal, WebMoney, Neteller, Fasapay, and the like. This method tends to be preferred because all transactions can be done online, quickly, and at a relatively lower cost.

In addition, there are transfers through third parties such as local exchanges, where the transfer fee can be zero and in terms of speed, it is superior. However, the last two options are often doubtful.

Also read: Simple Guide How to Make Money From Forex Trading Up To US$1000

4. Trading Platform

In online forex trading, the most important tool is the trading platform. Therefore, you should make sure that the trading platform can facilitate your trading style, is easy to use, and has the features you need.

One of the most popular trading platforms in the World is Metatrader. In addition to its full charting features and technical indicators, this platform also allows easy use of VPS and trading robots.

However, apart from this platform, there are also many variations of other platforms, such as cTrader, SIRIX, and others which may be specially created by the relevant forex broker.

Because there are many varieties, it’s a good idea to try trading on a demo account first on a trading platform provided by a forex broker before committing to a large investment.

Also read: The 6 Type Forex Market Participants In The World

5. Price Execution

Forex brokers should allow traders to trade at prices that match prices on the interbank market and at near-instant speed.

This is because the quality of execution will decrease if the price doesn’t match or execution is slow. The difference of just a few pips can determine whether the trade will be profitable or losing, especially for scalpers.

Because of this, forex brokers compete with each other in providing the best price quotes and the lowest latency. You, too, should choose a broker who can guarantee the best price quotes directly from their liquidity providers, and are able to execute prices sharply.

Also read: 6 Reasons and Advantages of Forex Trading that You Must Know

6. Customer Service (CS)

Forex brokers are not angels, so of course they have their flaws too and in relation to them you can run into some problems.

Therefore, it is important to choose a broker whose customer service (CS) is responsive and able to guide well.

CS forex brokers should not only be active at the time of registration and deposit, but must be ready to help solve your problems afterward, including guiding the withdrawal of funds.

In order to evaluate the feasibility of this forex broker, you can also take advantage of discussions or reviews about forex brokers on the Internet, including the rubric of the List of Popular Forex Brokers in Indonesia compiled by ForexMedia News.