At Defcofx we call ourselves a non-dealing desk broker, but how can users be sure? In fact, how can you be sure about any broker, without confirming it first? Is it even in your power, as a retail investor, to confirm an underlying execution model? Or should you simply believe in regulators and in what’s written in the user agreements?
Let’s explore this highly contentious topic once and for all.
Are All DD Brokers Bad?
Not necessarily. Some are well-regulated and provide fast execution, fixed spreads, and reliable service, having millions of satisfied customers. Some of the more reputable ones have even been explored on the Finance Magnates.
The cornerstone here is transparency — whether the broker is manipulating trades or genuinely providing fair execution to you. For example, if the non-DD broker you found openly says that it is a Market Maker on its website, that is a good sign. However, if the broker claims to offer STP/ECN accounts, when in fact it employs a Market Maker model, it means all bets are off the table. For many traders the most effective choice in this case is to run for the hills.
Why Are Dealing Desks Disliked by the Community?
Here are some reasons why DDs are commonly criticized by users:
1. Inherent conflict of interest
DD-brokers are able to control the BID and ASK prices on which your trade either survives or gets stopped-out. If you get stopped-out, your DD-broker — who has held onto his side of your trade — banks the profit which is the flip-side of your loss.
DD brokers take the opposite side of your trade, per the execution model they have. Which means when you lose, they profit. This creates a potential conflict of interest where the companies you trade with might not have your best interests at heart.
2. Slippage and re-quotes
Some DD brokers in the past have been known to intentionally delay order execution, causing slippage (where you enter or exit at a worse price than expected).
DD brokers also often have re-quotes — due to their internal execution process, which takes bank spreads, and adds a markup. When market conditions exceed the range which these “added spreads” can cover, DD brokers have to resort to re-quotes and slippage to fend off unprofitable customer orders. Re-quotes typically favor DD brokers much more than the user.
3. Stop-hunting
Some unethical DD brokers, having access to client positions, were once known to manipulate price feeds to trigger stop-losses artificially. This practice has cemented their bad reputation among veteran traders. Newer users might not know about this practice, but they can read about it in the broker reviews, as it is still a highly contentious topic in the community.
4. Manipulated spreads
Unlike ECN or STP brokers, who offer raw spreads, DD brokers can widen spreads to increase their profits, which results in some Market Makers actually having higher spreads than their non-DD counterparts. DD brokers compensate for this by having their spreads be more predictable, though.
Ways to Spot a Market Maker by Yourself
1. Check spreads before the exchanges closure
The easiest method is to check what happens at the time of exchange closure. For example, we at Defcofx broker offer 100% raw spreads — meaning all spreads are sourced directly from the exchange, and we do not have control over them, as all accounts operate on an ECN model. This allows us to offer our users consistently low spreads, as low as 0,3 pips. However, during the closing sessions of the NYC and other exchanges, spreads may widen heavily due to sudden reduced liquidity. There may even be liquidations because of this, which are beyond the broker’s control.
This is a standard practice for all true ECN brokers, which is why many day traders prefer not to open new positions before the exchange is about to close. This is a feature of the market commonly disliked by users, and that’s why many Market Makers try to minimize or eliminate shifts in spreads, sometimes offering fixed spreads instead. This is appreciated by users which happen to trade during NY, Tokyo, London, or Sydney closing sessions, but it ultimately means your broker is a Dealing Desk, whether you like it or not. If the website or the user agreement doesn’t clearly state this, this might mean the company is not being entirely honest.
A simple rule to remember:
● Non-DD brokers can only offer raw spreads, meaning spreads fluctuate based on market liquidity.
● DD brokers can offer fixed spreads (e.g., always 2 pips on EUR/USD).
2. Slippage and re-quotes policy
ECN or STP brokers, known for the lack of re-quotes, don’t have a dealing desk. This also counts for brokers claiming “Direct market access” (DMA). They rarely re-quote prices because the orders are sent to banks and other liquidity providers directly.
However, re-quotes happen much more often with DD brokers. The interbank market consists of dozens of institutions, each one of them defining their own quotes — then the quotes are routed to brokers they’re cooperating with. The brokers then use these quotes to route them to their clients. In case of DD, they add a mark-up on the spread making it wider. If you see quotes of 1.2043/24, your broker would actually see something like 1.2018/23.
If the underlying spreads widen drastically, the DD broker, to continue to earn from the marked-up spread, might have to introduce a slippage into the order.
DoM datastream, real ECN in MT5
3. Real market depth
ECN brokers can show Level 2 market depth, meaning you can see real buy/sell orders, and not just candlesticks. To open order books in MT5 for example, you can right-click on any asset pair in the platform UI, and select “Depth of Market”. This will show you the data stream coming in, and the order book, with limit orders waiting to be executed. In the case the broker doesn’t provide this, they are likely a dealing desk.
4. Clear limits on the size of opened trades
When a retail customer opens a trade with an NDD-broker, that broker simultaneously opens an offsetting trade with the bank, such that the NDD-broker’s net market exposure is zero. When the retail customer’s position with the broker is closed, the broker’s offsetting position with the bank is simultaneously closed.
With this (NDD) model, there is no conflict of interest between customer and broker, and no risk for the broker. Every downstream profit (from the customer) is offset by an upstream loss (to the bank), and vice versa. Which is why it can open even high lot orders on exotic pairs, without any issue (aside from widening spreads). Even a hundred lots on NZD/TRY or GBP/MXN shouldn’t be any issue to the interbank forex market. If a broker has access to top-tier liquidity from big providers, like Defcofx, the order size should not matter much.
If there are strict and relatively low size limits on your orders, however, this is likely a sign of your broker being a dealing desk, for better or worse.
Disclaimer: Article submitted by Defcofx broker team
This article was written by FL Contributors at www.forexlive.com.