Types of Brokers in Forex: An Essential Guide for Traders

You’ve spent weeks refining your strategy. You’ve mastered the RSI, you know exactly where your support and resistance levels sit, and your finger is hovering over the 'Buy' button for EUR/USD at 1.0850. You click. The trade is live.

But have you ever stopped to wonder where that trade actually went? Did your broker just match you with another trader? Did they take the other side of your bet? Or did they send your order to a massive bank in London?

Most intermediate traders understand how to trade, but many are surprisingly in the dark about who they are trading with. Choosing the wrong broker type is like trying to race a Ferrari on a dirt track—you might have the power, but the environment is working against you. In this guide, we’re going to pull back the curtain on Dealing Desks, STPs, and ECNs so you can decide which one actually deserves your capital.

The Dealing Desk (Market Makers) Explained

Dealing Desk (DD) brokers are often called 'Market Makers.' As the name suggests, they literally make the market for you. When you want to buy, they sell to you. When you want to sell, they buy from you.

Imagine you are at a casino. If you bet on red, the casino doesn't go out and find someone betting on black to match your wager; the casino takes your bet directly. Dealing Desk brokers work similarly. They maintain an 'inventory' of positions and use their own liquidity to fill your orders.

How They Make Money

Market makers primarily earn through the spread. If the 'real' market price for GBP/USD is 1.2650/1.2651, a Market Maker might quote you 1.2649/1.2652. That extra pip on either side is their profit margin for providing you with instant execution.

Example: You buy 1 standard lot of EUR/USD at 1.1000. The broker’s spread is 2 pips. This means you start the trade $20 in the red. If the broker doesn't offset your trade with another client or a liquidity provider, and you lose $500 on the trade, the broker effectively 'wins' that $500.

The "Conflict of Interest" Myth

You’ll often hear traders complain that Market Makers 'hunt stops' or trade against them. While this happened in the 'Wild West' days of forex, modern regulated brokers are heavily monitored. A reputable Market Maker wants you to keep trading because they want to collect the spread on thousands of your trades over a lifetime, not just take your deposit once and lose you as a customer.

No Dealing Desk (NDD): STP Brokers

If you don't like the idea of your broker being the 'house,' you’re looking for a No Dealing Desk (NDD) provider. The first flavor of this is Straight Through Processing (STP).

An STP broker acts as a bridge. They have a pool of liquidity providers (big banks like JP Morgan, Deutsche Bank, or hedge funds). When you click 'buy,' the broker instantly routes your order to one of these providers.

Why Traders Love STP

STP brokers usually offer variable spreads. During high liquidity (like the London/New York overlap), you might see spreads on EUR/USD as low as 0.3 pips. However, during news events, those spreads can widen to 5 or 10 pips.

Pro Tip: STP brokers are excellent for swing traders who don't mind a variable spread but want the peace of mind that their order is being filled in the 'real' market.

The Cost Structure

STP brokers make money by adding a small 'mark-up' to the best bid/ask price they get from their providers. If a bank offers them a spread of 0.2 pips, they might show you 0.7 pips.

The ECN Model: True Market Access

Electronic Communication Network (ECN) brokers are the gold standard for many professional and high-frequency traders. Instead of just routing your order to a few banks, an ECN puts you directly into a digital 'hub' where all participants (banks, hedge funds, and other retail traders) trade against each other.

The Transparency Factor

In an ECN environment, you can often see the 'Depth of Market' (DOM). This shows you how many lots are available at different price levels. If you want to buy 50 lots of USD/JPY, you can see exactly where the liquidity is to fill that massive order.

Commissions vs. Spreads

ECN brokers usually offer zero or near-zero spreads. However, they don't work for free. They charge a fixed commission per trade.

Example: You trade 1 standard lot of AUD/USD. The spread is 0.0 pips, but the broker charges a $7 round-turn commission.

Scenario A (Market Maker): Spread is 1.5 pips ($15 cost).
Scenario B (ECN): Spread is 0.1 pips ($1 cost) + $7 commission = $8 total cost.

For active traders, Scenario B is clearly the winner.

Hybrid Brokers: The Modern Standard

Most of the big names you see today actually use a Hybrid Model. They aren't just one type. Why? Because it’s more efficient for them and better for you.

They might handle small retail orders (micro-lots) through a Dealing Desk because it's too expensive to send a $1,000 trade to a major bank. But for their larger clients or during high volatility, they switch to an STP or ECN model to manage their own risk.

According to the Bank for International Settlements (BIS), the forex market sees over $7.5 trillion in daily turnover. Hybrid brokers allow retail traders to participate in this massive liquidity pool regardless of their account size.

Regulation: The Invisible Safety Net

It doesn't matter if your broker is ECN, STP, or a Market Maker if they aren't regulated. A 'True ECN' broker based in an offshore tax haven with no oversight is far riskier than a well-regulated Market Maker in the UK or Australia.

When choosing, look for Tier-1 regulators:

1. FCA (United Kingdom)
2. ASIC (Australia)
3. CySEC (Cyprus/Europe)
4. CFTC/NFA (USA)

These bodies ensure that the broker has sufficient capital and that your funds are kept in segregated accounts, meaning the broker can't use your trading capital to pay their office rent.

How to Choose Your Ideal Broker Type

Choosing a broker is a personal decision based on your trading style. Use this checklist to narrow it down:

1. The Scalper (Short-term)

• Needs: Lowest possible spreads, lightning-fast execution.
• Best Fit: ECN.
• Why: When you're aiming for 5-10 pip targets, a 2-pip spread is a 20-40% 'tax' on your profit. You need the raw spreads of an ECN.

2. The Day Trader / Swing Trader

• Needs: Reliability, decent spreads, no-hassle platform.
• Best Fit: STP or Hybrid.
• Why: You aren't entering 50 trades a day, so a slightly higher spread won't kill your edge, and you benefit from the simplicity of the NDD model.

3. The Beginner / Small Account

• Needs: Low minimum deposits, ability to trade micro-lots (0.01).
• Best Fit: Market Maker (Dealing Desk).
• Why: Many ECNs require larger deposits or have minimum commission charges that make small trades expensive. Market Makers provide the 'training wheels' you need to start.

Warning: Never choose a broker based solely on a 'deposit bonus.' These often come with restrictive terms that make it nearly impossible to withdraw your profits.

Conclusion

There is no "best" type of broker—only the best broker for your specific strategy. If you are trading high volume and need precision, the ECN model is your best friend. If you are just starting out and want fixed costs and simple execution, a reputable Market Maker is a perfectly valid choice.

The most important step you can take today is to look at your trading logs. Calculate how much you are paying in spreads versus commissions. If you realize your 'free' spread broker is actually costing you $200 a month more than an ECN commission model, it might be time to make a switch.

Ready to put this knowledge to the test? Check out our broker comparison tool to see how different providers stack up in real-time market conditions.

Frequently Asked Questions

What is the difference between ECN and STP brokers?

An STP broker routes your orders to its specific liquidity providers (banks), while an ECN broker connects you to a network where you trade against various participants, including other retail traders. ECNs usually offer lower spreads but charge a commission.

Are Market Makers a scam?

No. Regulated Market Makers provide essential liquidity to the market. While they do take the other side of your trade, they are governed by strict rules to ensure fair pricing. Problems usually only arise with unregulated offshore brokers.

How do I know if my broker is a true ECN?

True ECN brokers will provide a 'Depth of Market' (DOM) window, show variable spreads (often starting at 0.0 pips), and clearly state their commission structure. If a broker offers "ECN" but has fixed spreads and no commission, it is likely a Market Maker using ECN as a marketing term.

Which broker type is best for scalping?

ECN brokers are generally best for scalping because they offer the tightest spreads. Since scalpers target small price moves, paying a small commission is usually cheaper than paying a wide spread on every entry and exit.