NDD means Non-Dealing Desk, and in the context of Forex (Foreign Exchange) trading refers to a type of order execution adopted by Forex brokerage firms.
It’s important to note that contemporary Forex brokers often adopt a hybrid execution model. Although NDD is a core component of their operations, they may also integrate aspects of ECN (Electronic Communication Network) and sometimes even elements of the Market Maker model. This combination allows brokers to offer a diverse range of account types, catering to different trading strategies and preferences.
While ‘NDD broker’ is a term commonly used for its simplicity, it’s more accurate to consider the varied execution styles that brokers may utilize.
For the sake of clarity and to use familiar terminology in this guide, we will refer to the NDD Forex broker as a distinct category, focusing on its unique characteristics and the benefits of this execution approach.
What is an NDD Forex broker?
A Non-Dealing Desk (NDD) Forex broker is a brokerage firm that provides direct access to the interbank market, facilitating trades without passing them through a traditional dealing desk.
Instead, it hedges clients’ positions by offsetting them with Liquidity Providers, effectively managing counterparty risk. This process ensures market prices are more transparent and eliminates potential conflicts of interest inherent in the Market Maker model.
What does No Dealing Desk mean?
In the world of Forex trading, the term “Non-Dealing Desk” (NDD) can be somewhat misleading, as it suggests a complete absence of a dealing desk. However, the reality is slightly different, particularly when considering that Forex trading typically involves Contracts for Difference (CFDs).
In CFD trading, the broker is always your counterparty. This means that when you open a position in the Forex market, you’re essentially entering into a contract with the broker.
What distinguishes a Non-Dealing Desk broker from Dealing Desk brokers is the way it manages the risks associated with being the counterparty to your trades.
NDD brokers employ a strategy known as hedging to mitigate the risks they face from their clients’ trades. This hedging process involves offsetting the positions taken by traders by executing equal trades with Liquidity Providers. By doing this, an NDD broker Forex can balance out the profits and losses from the trades they counter, effectively managing the counterparty risk.
Above all, this means that an NDD broker aligns his interests with those of the trader, and does not profit from his losses, effectively eliminating conflicts of interest.
On the other hand, Market Makers, which represent a different type of Forex broker, operate without this hedging process. They take on the full risk of the counterparty trades without seeking to offset this risk through Liquidity Providers. This means that Market Makers bear the entire brunt of the risk associated with their clients’ trading activities.
In essence, while both NDD brokers and Market Makers serve as counterparties to your trades, their approach to managing the inherent risks of this role is fundamentally different. NDD brokers mitigate these risks through hedging with Liquidity Providers, whereas Market Makers assume full responsibility for them.
How do NDD Forex brokers work?
An NDD (Non-Dealing Desk) Forex broker operates through a series of interconnected steps, all aimed at providing retail traders with a seamless and transparent trading experience.
Initially, the NDD broker receives a stream of pricing data and quotes from various Liquidity Providers (LPs) it has direct partnerships with. These providers can include Prime Brokers, Prime of Primes, Electronic Communication Networks (ECNs), and non-bank liquidity providers.
The broker’s role here is to aggregate this information to ensure that traders are given access to the most competitive and accurate market prices available.
Once the broker has aggregated these prices, they offer traders the tightest possible spreads.
When a trader decides to open a position, they are essentially entering into a Contract for Difference (CFD) with the broker. This contract reflects the trader’s speculation on the future direction of a currency pair’s price. It’s important to note that the trader is not buying or selling actual currency but rather a derivative product that tracks the price movement of the currency pair.
After a trade is executed, the NDD broker’s role shifts to managing the risk associated with being the counterparty to the trade. To do this, the broker hedges the trade with one or more of its Liquidity Providers.
This hedging process involves the broker taking an equal position to the trader’s with the Liquidity Provider. By doing so, the broker can offset any potential profit or loss arising from the trader’s position.
This option of externalising risk by hedging trades as opposed to internalising risk by acting entirely as a counterparty is called A-Book vs B-Book.
What are the different NDD order execution types?
There are two main execution types in a NDD model:
- STP (Straight Through Processing)
- ENC (Electronic Communication Network)
How does STP execution work?
STP (Straight Through Processing) is a very common type of NDD execution. In this case, when the broker receives an order from the trader, it executes the corresponding CFD, for which it is the counterparty, at the best price received from one of its liquidity providers, charging a premium in the form of a markup on the spread.
The STP broker will then replicate the same trade at the liquidity provider, and the latter will act as the broker’s counterparty.
How does ECN execution work?
ECN (Electronic Communication Network) is the most advanced type of NDD execution. In this case, the broker receives from the ECN a data stream with the best buy and sell prices, directly aggregated from the ECN.
When the trader opens a trade, the ECN broker will immediately counterparty it with a CFD, and then it will replicate the same trade with the ECN, which will match it with a counterparty inside it.
Can NDD brokers manipulate prices?
While it is less likely for NDD (Non-Dealing Desk) Forex brokers to manipulate prices, it is not entirely impossible, as they are still market makers providing CFDs.
However, in the NDD model, brokers earn their revenue primarily through spreads and commissions rather than from traders’ losses. This fundamental difference in revenue generation aligns the broker’s interests more closely with those of their clients, as their profitability is not directly linked to the trading losses of traders.
Another crucial factor that reduces the likelihood of price manipulation by NDD brokers is regulation. Most reputable NDD brokers are subject to stringent regulatory oversight by financial authorities. These regulatory bodies enforce rules and standards designed to ensure fair trading practices and to protect the interests of traders. Brokers are required to adhere to these standards, which include providing transparent pricing and fair execution of trades.
How do trading fees work on NDD brokers?
NDD Forex brokers typically charge trading fees either through a markup on the spread or via commissions on trades.
In the NDD model, brokers can apply a markup to the spread they receive from their liquidity providers. By marking up (adding an additional fixed fee) this spread slightly, NDD brokers earn revenue on each trade executed.
Alternatively, some NDD brokers charge a commission on trades, usually on ECN execution. This fee is usually a fixed amount per lot traded or a percentage of the trade’s volume.
How do NDD brokers compare to Market Makers (DD)?
Following is a comparison of the NDD model with the Market Maker model in Forex brokers:
- Risk Management Approach: NDD brokers hedge risk with external liquidity providers, reducing exposure. Market Makers, as counterparties to trades, absorb these risks, posing a potential conflict of interest.
- Pricing and Spreads: NDD brokers offer variable spreads influenced by liquidity sources, while Market Makers typically have fixed spreads, which may not always reflect real market conditions.
- Execution of Trades: NDD brokers ensure faster trade execution through direct market access, whereas Market Makers might have slower execution, leading to possible re-quotes in fast-moving markets.
- Transparency and Conflict of Interest: NDD brokers are seen as more transparent, passing trades to external parties without benefiting from client losses. Market Makers face conflicts of interest, potentially manipulating prices due to their control over execution.
- Regulatory Oversight: Both types of brokers are regulated, but Market Makers may face stricter requirements due to their potential conflicts of interest.
In summary, an NDD Forex broker is usually preferred for its transparency and efficient execution, while a Market Maker Forex broker offers stability with fixed spreads.
How do NDD brokers make money?
Under the Non-Dealing Desk (NDD) model, Forex brokers have distinct ways of earning money, which primarily revolve around trading fees and non-trading fees.
In the case of STP (Straight Through Processing) brokers, the primary source of revenue is through spread markups. These brokers receive raw spreads from their liquidity providers and add a small markup before passing these prices onto traders. This markup represents the broker’s profit margin.
On the other hand, ECN (Electronic Communication Network) brokers, typically earn money through commissions on trades. Instead of marking up the spread, ECN brokers charge a commission for every transaction, calculated on percentage or lot size.
NDD Forex brokers also generate revenue through swap fees, which are small commissions charged on positions held overnight by traders.
Trading fees represent the most important part of how a Forex broker makes money.
Apart from these trading fees, all NDD brokers also generate income through various non-trading fees. These can include charges for various currency conversions, inactivity fees for dormant accounts, withdrawal fees, and other administrative costs. Such fees are a consistent source of income for brokers, supplementing their earnings from trading activities.
Pros and Cons of NDD Forex brokers
NDD Forex brokers have several advantages, but also a number of disadvantages of which you need to be aware. Below is a list of the pros and cons of NDD Forex brokers:
Pros of NDD brokers:
- Transparency: NDD brokers provide direct access to the interbank market, offering more transparent pricing.
- No Conflict of Interest: Since they don’t trade against their clients, there’s less potential for a conflict of interest.
- Better Market Prices: Traders often get better bid/ask prices due to the aggregation of prices from multiple liquidity providers.
- Faster Execution: Orders are typically executed more quickly and efficiently, reducing the risk of slippage.
- Variable Spreads: Often result in lower costs during times of high liquidity.
Cons of NDD brokers:
- Variable Spreads Can Widen: During volatile market conditions, spreads can widen significantly, increasing trading costs.
- Minimum Capital Requirement: These brokers often require a slightly higher minimum deposit compared to Market Makers.
- Less Predictable Costs: Variable spreads make it harder to predict trading costs in advance.
Are there risks in trading with NDD brokers?
In the NDD model, while the inherent risks of trading remain unchanged, there are specific risks such as spread widening and slippage.
Spread widening in the NDD model occurs because these brokers provide market-based spreads, which can vary significantly depending on the liquidity and volatility in the market. During periods of high volatility or major economic events, the spread – the difference between the bid and ask price – can widen considerably. This widening means higher trading costs for traders, as they pay more to enter and exit trades.
Slippage is another risk inherent in the NDD model. It happens when there is a difference between the expected price of a trade and the price at which the trade is actually executed. This can occur during fast-moving markets or when large orders are placed, and the liquidity at the desired price level is insufficient. Slippage can result in trades being executed at less favourable prices, impacting the profitability of trading strategies.
What are the best NDD brokers?
The brokerage firms considered to be among the top NDD Forex brokers are:
- FP Markets
These are only five of the brokerage firms recognised as the best NDD Forex brokers around, although there are also many others.
What is the best NDD trading platform?
Given their commitment to quality and flexibility, NDD Forex brokers typically offer a wide range of top-quality trading platforms.
These platforms include both proprietary systems developed by the brokers themselves and popular third-party options, like MT4 (MetaTrader 4), MT5 (MetaTrader 5), and cTrader.
Who should choose an NDD broker?
NDD brokers are a suitable choice for traders at all levels who are looking for a fair and efficient trading environment, but they are particularly favoured by those who rely on quick execution and have a good understanding of the Forex market.
NDD (Non-Dealing Desk) Forex brokers are ideal for traders who prioritize transparency in their trading activities. They provide direct access to a network of liquidity providers, ensuring that traders receive the best available market prices.
Another key advantage of NDD brokers is the speed of trade execution. Since orders are passed directly to liquidity providers, trades are executed swiftly, minimizing the risk of slippage – a crucial factor for traders engaging in strategies that rely on fast and precise execution.
Moreover, NDD brokers are often preferred by experienced traders who value tight spreads and access to deep liquidity. These features are especially beneficial for high-volume traders, such as day traders and scalpers, who need to quickly enter and exit positions to capitalize on small price movements.
Additionally, NDD brokers typically offer a range of advanced trading platforms and tools, catering to the needs of sophisticated traders who require comprehensive analytical and automated trading options.
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