ECN, NDD, STP — if you know what you words mean, then you can safely consider yourself a professional in stock trading. If you do not even know which execution of the order at the broker, then this article will help you to clarify something.
Let’s try to explain briefly how generally the order is executed at the broker:
- broker is the financial intermediary (if we are talking about a company like A-Book), which displays a client’s order to buy or sell an asset in the global financial market;
- the transaction takes place only when it is a response opposing the application, set by another trader;
- implementation of the application is provided by the liquidity providers (e.g., investment banks), which have a vast reserve of currency;
- the whole scheme should take place as quickly as possible (less than seconds). And for a trade to be executed at the best price (because every second in the exchange space can be thousands of opposite applications, among which the need to find the best) broker must have a relevant electronic system (the type of order execution at the broker) that provides immediate implementation of the application of the client.
This is a general scheme, which, of course, has its own nuances. However, there are brokers that execute orders for 0.2 sec or for 0.5 sec. And how fast is the broker, is reflected on the transactions and on the income of the trader.
The execution of an order with a broker: types and benefits
It is conditionally possible to divide into kinds and types of order execution. Let’s start from the types:
1. Instant Execution
This type provides the execution by the broker of bid at the price mentioned by the trader or its failure altogether. The trader sets the hallway of the price deviation: if, during the processing of the request the price has changed, but remained in the corridor, the order is executed with the correction of prices. Otherwise, the request is not executed at all.
- the ability to enter the market at an exact price which is essential for some strategies;
- ability to set Take Profit and Stop Loss at the time of making the order.
Disadvantages — the presence of requotes, the number of which depends on the volatility of the market. Requotes is a request of the broker to the trader, there is a sense of open positions at the new price. Sometimes they help to open the deal at the best price, but often they only delay and deny the trader the opportunity to open a position. For example, scalping in volatile market — the dream of the trader, but the constant queries of the broker only hinder to successfully enter a trade.
Important: read carefully the terms and conditions of exhibiting requotes by the broker! Usually, the trader is given a 4-6 seconds on the decision (agreed in the terms of work with the company).
2. Market Execution
No matter what the price will be at the time of execution of the warrant, the application would in any case be executed. Moreover, the price may vary in both directions from the one that the investor sees in the window of the trading platform.
- direct entry into the market with higher speed (order execution at the broker is faster);
- 100% guarantee of entry into the market (no re-quotes).
Disadvantages — high risk of loss due to the fact that in volatile markets the price may differ for a short period of time. Also there is no possibility to set the Take Profit and Stop Loss because of an unknown order execution price.
Important: much depends on the integrity of the broker. He could wait, for example, 3-5 seconds, and open the transaction more profitable price for the trader. This type of execution is often chosen by dishonest brokers, which together with the floating spreads quickly pick up money from unsuspecting traders. But this tool in the hands of professional brokers is the ability to conveniently work Forex guru.
Now we will tell you more about the types of order execution at the broker:
1. NDD (No Dealing Desk).
Type of order execution at the broker where the broker directly displays the client’s request on the interbank market, bypassing the market makers. Market-makers — companies that at their own risk accept responsibility for buying the asset and its storage. In a moment of lack of active market makers release the asset to the market, providing liquidity.
When the trader gives the broker the command for the execution of a transaction, the broker may automatically route the requisition to the counterparty, which will make dealing center. Inside dealing center there is offset filings of several traders (clearing).
But there is another option — automatic redirection of trading applications directly to liquidity providers, it is NDD, working on accounts of Market Execution type. The advantages of this type of order execution:
- transparency of the transaction. The broker acts only as a mediator (not a party of the transaction) and cannot manipulate quotations. The income of the broker is part of the spread (the difference between the purchase and sale of an asset)
- no requotes (slippage of application because of change of price)
2. STP (Straight Through Processing)
One of the types of NDD, which automates the processing of the transaction. Applications will go directly to the liquidity providers and the more, the better for the trader. The use of STP eliminates the conflict between broker and client. Plus of this type of execution is that the broker is not interested to cheat the customer.
3. ECN (Electronic Communication Network)
Electronic system linking all liquidity providersб brokers and traders in a single cloud with the goal of providing a minimum of intermediaries in the transaction. In fact, this is a network, where the orders are set, that are executed between them with coincidence of rates, volumes and conditions. In the ECN system, orders are placed directly to the cloud without going through a broker. Moreover, the trader actually has the same function as broker.
The most famous ECN-systems include Currenex, FX Alliance, Atraix. The Currenex system consists of approximately 40 investment banks worldwide, not including large corporations and smaller financial institutions.
The advantages of using ECN:
- instant execution of trades (in contrast to the conventional design);
- no price slippage (requote);
- there is no opportunity to trade against the client;
- minimum spreads (depends on broker);
- no restrictions on the use of strategies.
How to choose the type of order execution at the broker: to understand the working principles of all types of accounts and try trading on different accounts on a single instrument (good, if the broker provides such an opportunity!). You yourself will quickly see in what case more losing trades will be opened. And there is no answer to the question: “What the score is better?”, because everyone chooses for himself what he prefers (depending on trading tactics).
- Major brokers have terms of opening different types of accounts in one or another platform on the website. In addition to the fundamental difference in the execution of orders by the broker, there is also a difference in trading conditions and it is also an important factor influencing the shape and type of account.
Summary. Different accounts of the broker support different types of order execution. You want to avoid requotes? Want instant execution of trades, but are you willing to bear the risks in volatile markets? You’re interested in a certain safety orders? Before opening a trading account be sure to check what is the execution account with a broker and penetrate deeply into their fundamental difference. I only outlined the possible options and now the choice is yours. Remember that this choice may depend on your income!