You must already know that forex brokers are classified into several types. The difference between these brokers lies in the business model and the way they execute client orders.

The type of broker you choose can impact your overall trading experience, including execution speed, spreads offered, and potential conflicts of interest.

Therefore, it is important to understand the type of broker you are using to make better trading decisions according to your needs and preferences.

The following are the types of forex brokers you need to know:

1. Dealing Desk (DD) Brokers/Market Makers
2. Non-Dealing Desk (NDD) Brokers
   • STP Brokers
   • ECN Brokers
3. Hybrid Brokers 

To get a more detailed explanation, of the advantages and disadvantages of each broker, please read the article below completely.

Dealing Desk (DD) Brokers/Market Makers

First, there is the Dealing Desk brokers which is often shortened to DD brokers. This broker is also often referred to as a Market Maker broker. Why is it called that?

DD brokers as if creating markets and setting their exchange rates for their clients. For example, if you open a EUR/USD buy position of 1 standard lot, the DD broker will try to match the order with an equivalent sell order from another trader first to minimize risk. However, if there are no matching orders, they will take the opposite position to yours.

Even though it seems like there was a little manipulation, in reality, that's not what happened. They still provide buying and selling options, regardless of the trader's choice.

One of the weaknesses is that because they are Market Makers, aka bookies, traders do not see the actual foreign exchange rates occurring on the interbank market. Apart from that, both large and small dealers often take positions opposite to traders.

If you choose to trade with a Market Maker broker, make sure that you are dealing with a Dealing Desk broker that is registered (regulated) as a brokerage company and has a good reputation. The recognized regulators are NFA or CFTC United States, FCA United Kingdom, and ASIC Australia.

Why should you prioritize regulated brokers? Apart from the security aspect, choosing a regulated DD broker will prevent you from bucket shop brokers or street brokers, namely brokers who do not execute directly to the market, but instead manage their clients' trades themselves.

Bucket shop brokers are usually not regulated by official regulatory bodies. They tend to operate without strict regulation or even no regulation at all. Therefore, they have a great opportunity to manipulate transactions or carry out fraudulent practices.

Characteristics of bucket shop brokers include:

• Located in an obscure place or only offshore licensed.
• Allowing money transfers to third parties or individuals without providing adequate protection for clients.
• Easy registration without verification.
• Restrict or prohibit the use of certain trading techniques such as scalping or martingale. Some allow it but use automatic scripts such as Virtual Dealer to inhibit this technique.
• Offering too high leverage, unreasonably low spreads, or huge bonuses that are too good to be true.

Non-Dealing Desk (NDD) Brokers

Next, there are Non-Dealing Desk brokers often abbreviated as NDD brokers. This type of broker does not act as a counterparty to a trader's transactions but rather connects traders directly to the interbank market or other liquidity. Thus, NDD brokers do not intervene in trade execution and have no conflict of interest with clients.

NDD brokers are divided into 3 based on their trade execution model, namely:

1. STP Brokers

STP (Straight Through Processing) brokers are a type of broker that forwards client orders directly to liquidity providers, such as large banks or other financial institutions, without internal dealing desk intervention.

This means the STP broker acts as an intermediary between traders and the interbank market, enabling faster and more transparent trade execution.

One of the main characteristics of STP brokers is the existence of several liquidity providers at once. Each liquidity provider can offer different bid/ask quotes, and the STP broker will choose the best quote to convey to clients.

For example, if an STP broker has three liquidity providers with different quotes, the system will choose the best quote at that time too.

STP brokers usually benefit from the spread which is charged on each transaction made by the trader. This spread is added to the price rate provided by the liquidity provider and can be a variable/floating spread that changes according to market conditions, not fixed.

2. ECN Brokers

ECN Broker is a type of broker that provides direct access to the interbank market via the Electronic Communication Network (ECN). In an ECN environment, clients have the opportunity to interact directly with participants in the market, including banks, hedge funds, other brokers, and individual traders. This allows for more transparent trade execution and avoids conflicts of interest.

One of the main features of ECN brokers is the ability to view the "Depth of Market" (DOM). DOM allows traders to see buy and sell orders from other market participants, thus providing a clearer picture of market activity and the potential direction of price movements.

Because of their nature of providing direct access to the interbank market, ECN brokers usually require a large deposit of funds and charge a commission per lot traded. However, these additional costs are often outweighed by the benefits of tighter spreads and execution transparency.

Hybrid Brokers

Hybrid brokers are a combination of ECN/STP brokers with Dealing Desk brokers. This means a hybrid broker has some of the features of each model.

One of the main characteristics of hybrid brokers is the order handling rules which can vary depending on the trading volume and the type of account used by the trader.

For example, accounts with small trading volumes (lot 0.1) or lower may be handled by the dealing desk (DD) because they are too small to send to liquidity providers or markets.

However, for orders with larger volumes, the hybrid broker will execute the order according to the STP/ECN model, namely by forwarding it directly to the market or liquidity provider.

The Pros and Cons

After knowing the various types of forex brokers and their differences, it is important to understand the advantages and disadvantages of each type of broker so you can choose one that suits your trading needs. Here are some of the advantages and disadvantages of DD, STP, ECN, and Hybrid brokers:

That is a summary of the advantages and disadvantages of Market Maker, STP, ECN, and Hybrid forex brokers. Therefore, you must fully understand the differences and characteristics of each type of broker before deciding to open a trading account.

Understanding the type of forex broker to choose can help you make better decisions in managing risk, selecting appropriate trading strategies, and achieving investment goals.

Before choosing a broker, consider factors such as liquidity, execution transparency, trading costs, platform reliability, regulations, and broker reputation. Apart from that, it is also important to read reviews and get recommendations from other more experienced traders.