A dealing desk broker, otherwise known as a market-maker is a brokerage who essentially “makes the market” in representation of the real market. You’re not trading the real market. You’re trading the market your broker provides for you.

You should know that the rates the market maker gives you are not made up out of nowhere. More times than not, they’re actually close to what the real market has. It’s just not the real interbank market that large institutions are trading through.

When it comes to dealing desk brokers, they make money from the spread off of each trade. Remember, trading is a zero-sum game. Meaning if you win, someone has to lose. If you lose, someone won.

NOTE: Some people also call trading a negative-sum game because even if you open a trade and close it 1 second later, you lost some money. It can be a penny, 10 cents, or $1, you instantly lose money from the spread off of each trade so most people look at trading as either you win or you lose.

So with market makers, they place your trade with someone on the opposite end. Meaning if you’re buying EUR/USD, they’re going to match you up with someone who is selling EUR/USD; that way they can make money off the spread and if you win you win, if you lose, you lose.

The issue most people have with market makers though is that if they CAN’T find someone to match you up with, they ultimately have to take the opposite side of your trade. Meaning if you’re buying EUR/USD, then in order to execute your trade as you requested, they have to SELL EUR/USD…. Against you….. On a market THEY created… yeah, HUGE conflict of interest.

A lot of reasons I’ve seen people not use market maker brokers is because you never know if you lost just because you had the wrong bias, or because your broker knows exactly where your stop loss is placed, potentially can forcefully move the market against you and stop you out, before price continues in the overall true direction.

One of the pros of using a market maker is most times, the spread is fixed. Regardless if the market is changing or not, the spread of a pair a lot of the times will remain the same. That way, you know the spread (price you pay to enter a trade/difference between the bid & ask price) always in the back of your mind.

What you should know is that all market makers are not in it just to see their clients lose. Actually most don’t want to see that. If all of their clients and they make all the money, they may make a few million but they’ll go out of business the next year due to terrible reviews about the broker and their clients closing their accounts. Due to the competitiveness of other market maker brokers, regulated market makers aren’t allowed to forcefully stop you out. Well they can, but they’ll be in trouble if they get caught. For example: A huge broker most forex traders know about, FXCM, was banned by the CFTC from operating in the United States due to taking positions directly against clients and using their own market making broker to their advantage. Unregulated brokers can do that with no repercussions, but regulated brokers can not. (We’ll talk more about regulated brokers vs. unregulated next).

An ECN or Non-Dealing Desk broker is a broker who does NOT create a market for their clients. The trades of their clients actually get routed to the best price possible offered by a liquidity provider (banks, large institutions, etc). What this means is: there is NO conflict of interest in your trading. They do NOT take the opposite side of your trades. They simply send your trade to a liquidity provider and take a small commission from each trade.

What this means is, there is a list of all the best bid & ask prices from several different liquidity providers and your ECN broker is just trying to see which bid & ask price is the best to get you in on with your trade, with the lowest possible spread.

Your broker makes money on the spread and sometimes even charge a small commission; but they have NO interest on if you win or lose. They are simply providing you access to the interbank market. Regulated ECN brokers are not manipulating prices for retail traders.

ECN brokers offer a variable spread. Meaning one day, EUR/USD’s spread can be a 6, and the next day, it can be 13 depending on what’s going on with the Euro & the US Dollar, if there’s a fundamental announcement (news) coming out, if its less volatile because the market just opened up or is closing, and etc.

One of the cons to using an ECN broker is that some of the fees are genuinely higher/more expensive than brokers who don’t use an Electronic Communications Network.

At the end of the day, choose whatever broker fits best for you. You may want a broker that offers a fixed spread and if it’s regulated, market makers number 1 priority before taking the opposite side of your trade, is to find another trader who has the opposite side of your trade which isn’t a conflict of interest.

You also may want a broker that doesn’t provide any type of conflict of interest when it comes to taking the opposite side of your trades, you don’t mind the variable spreads, and want direct access to the interbank market, then an ECN broker is the one for you.

After figuring out if you want to trade with a dealing desk broker or a no-dealing desk, the next thing you need to figure out is, if you’re going to use a regulated broker or an unregulated broker!