<Last updated 14.04.2020>
Hi! If you are interested in Forex please read carefully the below article so you can understand what we mean by Brokers offering CFDs for online trading.
What kind of Financial Institutions are CFD Brokers?
These are financial institutions offering Forex and CFD investment services. These services allow online traders/investors to trade the financial markets through CFDs, derivative contracts.
These derivative contracts, that can be bought or sold, are called “contracts for difference” or CFDs . These CFDs represent other assets called underlying assets and CFDs value is derived from these. Most Brokers let you trade CFDs on Forex (foreign exchange), Stocks, Futures, Metals, Energy and Cryptocurrencies.
Think of buying a CFD as buying a car. Then, you want to sell that car at a higher price in order to have a profit. You are expecting that the price of that asset is going to go upwards. Once you sell the asset back to the market, hopefully, you will end up with a profit.
Below is an example of a Market Watch. This is part of a Trading Platform and it shows the Instrument/Currency pair, Prices (BID and ASK), Price difference in points (Spread) and Time of last update..
What is the difference between “Dealing Desk” and “No Dealing Desk” brokers?
Dealing Desk brokers are also called Market Makers.
Non Dealing Desks can be further subdivided into:
- Straight Through Processing (STP) and
- Electronic Communication Network + Straight Through Processing (ECN+STP).
Dealing Desk brokers create a market for their clients, meaning they often take the other side of a client’s trade.
Market makers provide both a sell and buy quote, which means that they are filling both buy and sell orders of their clients. They are the sole execution venue. The competition among brokers is huge so the the rates offered by Dealing Desks brokers are similar, if not the same, to the interbank rates.
No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk > This means that they do not take the other side of their clients’ trade as they simply link two parties together. They can be STP or STP+ECN. NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.
So, when you decide to send an order, BUY EURUSD 100,000 untis, your order is sent through your broker (Straight Through Processed) and then routed to either Liquidity Provider A or B for execution. If the spreads of their liquidity providers widen, they have no choice but to have wide spreads too.
True ECN forex brokers, on the other hand, allow the orders of their clients to interact with the orders of other participants in the ECN. Participants trade with each other by offering their best bid and ask prices.
These brokers can provide “Depth of Market” to their clients.
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