{"id":17232,"date":"2023-04-03T14:42:40","date_gmt":"2023-04-03T11:42:40","guid":{"rendered":"https:\/\/t4t-com-php8.wp-dev.int.theitops.net\/?p=17232"},"modified":"2023-10-30T11:31:59","modified_gmt":"2023-10-30T09:31:59","slug":"different-types-of-cfd-brokers","status":"publish","type":"post","link":"https:\/\/www.t4trade.com\/nl\/different-types-of-cfd-brokers\/","title":{"rendered":"Different Types of CFD Brokers"},"content":{"rendered":"

CFDs are financial derivatives that allow traders to speculate on the price of the underlying assets without having to physically own the asset. CFD brokers<\/a> enable traders to buy or sell CFDs based on the price movements of the underlying assets such as forex, stocks, commodities, etc.<\/p>\n\n\n\n

CFD brokers typically provide traders with trading platforms, access to different global markets, and a range of trading tools and resources. CFD brokers earn their revenue through the spread, which is the difference between the bid and ask price of the CFD<\/a>.<\/p>\n\n\n\n

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A key attraction of CFD trading<\/a> is access to leverage which enables traders to control larger positions than their actual capital investment would accommodate. However, this does increase the risk involved in trading, as losses may be amplified. Therefore, traders need to understand the significant risks involved in CFD trading and use risk management strategies to mitigate their exposure.<\/p>\n\n\n\n

CFD brokers can typically be categorised into Market Maker brokers and No Dealing Desk (NDD) brokers. No Dealing Desk brokers can be further categorised into Electronic Communication Network (ECN) brokers and Straight Through Processing (STP) brokers. In this article, we\u2019ll take a closer look at how they differ from one another.<\/p>\n\n\n\n

Market Maker Brokers<\/strong><\/h2>\n\n\n\n

Also known as Dealing Desk brokers, these brokers provide a variety of CFDs that cover global financial markets like forex, commodities, shares, indices, etc. Traders can go long or short on these markets. Market brokers essentially create the market for their clients so often take the other side of a client\u2019s trade. Market makers have their liquidity. They create their prices for the CFDs they offer (i.e., they provide both a sell and a buy quote). To a degree, this is usually based on the price of the underlying asset.<\/p>\n\n\n\n

A market maker typically makes money from the spread between the bid and ask prices, and by providing liquidity to their clients. The size of the bid-offer spread is largely dependent on the liquidity and volatility of the underlying asset. As a result, market makers may offer narrower or wider spreads dependent on the particular instrument. However, being that market maker brokers control the prices at which orders are filled, fixed spreads are also common.<\/p>\n\n\n\n

Reasons why traders choose market maker brokers<\/strong><\/h3>\n\n\n\n

There are several reasons that traders engage in the services of market maker brokers. These include fixed spreads, lower entry barriers, potential for quick executions, single-price quotations, and no commission on trades. Market makers may also offer additional services such as risk management tools, educational resources, and handelsplatforms<\/a>.<\/p>\n\n\n\n

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No Dealing Desk Broker<\/strong><\/h2>\n\n\n\n

As the name implies, these brokers do not pass client orders through a dealing desk. Instead, they provide a trading platform that allows clients to trade directly with the interbank rates. In other words, they send buy and sell orders directly to the forex market<\/a>. They do this through liquidity providers, banks, financial institutions, other brokers, etc). Two types of No Dealing Desk brokers are STP brokers and ECN brokers.<\/p>\n\n\n\n

Straight-Through-Processing (STP) Broker<\/strong><\/h3>\n\n\n\n

This broker routes client orders directly to their liquidity providers with whom they work, and who have access to real-time interbank market rates. Each liquidity provider quotes their bid and asks prices and executes the trades. So what does this look like in practice relative to forex<\/a>? Well, if your STP broker has access to 3 liquidity providers, in their trading platform you will see 3 different quotes of bid and ask prices for a particular currency pair (e.g., EUR\/USD). In this way, by working with an STP broker, a trader gains access to the most competitive bid and ask prices available in the forex market.<\/p>\n\n\n\n

Electronic Communications Network (ECN) brokers<\/strong><\/h3>\n\n\n\n

Like STP brokers, ECN brokers pass client orders to the interbank market. However, they don\u2019t always use liquidity brokers to do this. Instead, ECN brokers sometimes use prime brokers who can take up these offers. ECN brokers are all STP brokers, whereas not all STP brokers are ECN brokers.<\/p>\n\n\n\n

Disadvantages of trading on ECN or STP platforms<\/strong><\/h3>\n\n\n\n

ECN and STP platforms are commonly known for their transparency and speed of execution. However, there are some disadvantages to trading on these:<\/p>\n\n\n\n