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I. Classification of foreign exchange trading platforms
Let's first understand the classification of foreign exchange platforms.
There are two online foreign exchange trading platforms: DD and NDD, among which NDD can be further subdivided into STP, DMA/STP and ESC+STP. As shown in the figure below.
1.DD foreign exchange trading platform, also known as MM, is a market maker.
Usually DD foreign exchange trading platform has trading platform or trading desk to process orders, and the spread type is set to fixed. Market makers themselves make profits through spreads, and when necessary, they will trade in reverse with customers, which, as the name implies, is to "make a market" for customers. Such platforms belong to the "manufacturing market". Under certain conditions, market makers will always be in the opposite position to traders and "make market" in the opposite way to traders. Therefore, the spread of the market maker platform is generally fixed, so the risk will be much smaller.
2.NDD foreign exchange trading platform
As the name implies, without a trading desk, there is no processing platform. Brokers don't do door-to-door transactions of traders, but only connect traders with the interbank market, so traders can trade directly at the level of the interbank foreign exchange market. NDD's foreign exchange trading platform plays a bridge role, connecting the two directly and giving individual traders the opportunity to trade. Moreover, the real NDD foreign exchange trading platform will not require re-quotation, and there will be no extra pause when the order is confirmed, so there will be no restrictions when trading according to the news. But generally speaking, the trading scale of individual traders is too small to refer to the foreign exchange transactions in the inter-bank foreign exchange trading market.
NDD foreign exchange trading platforms are divided into two categories, one is STP, and the other is ECN+STP.
(1)STP foreign exchange trading platform, that is, straight-through processing.
STP foreign exchange trading platform, that is, straight-through processing, customers' orders are sent directly to banks, and these liquidity providers can trade directly in the inter-bank foreign exchange trading market.
As a trader on STP platform, he can see the real-time market price and execute the order immediately without the intervention of the trading desk, which means straight-through processing.
(2)ECN foreign exchange trading platform, namely electronic communication network.
ECN foreign exchange trading platform, namely electronic communication network, allows customers to interact with other customers, in other words, customers' orders can interact with those of other participants in the market. ECN foreign exchange trading platform provides a market for all participants, in which all participants (banks, retail foreign exchange traders, hedge funds, brokers, etc. ) conduct home-to-home transactions by sending their competitive bids to the ECN system. All trading orders will be matched in real time by one party in the opposite direction.
At present, some brokers claim that their trading platforms are real ECN platforms, but in fact their systems are only STP, that is, straight-through processing systems, and there are only a handful of ECN platforms in the strict sense.
In the real ECN trading platform, brokers will inevitably display the market depth DOM in a data window, which enables customers to see where other participants buy or sell orders. In other words, on the ECN foreign exchange trading platform, traders can know where there is liquidity to execute orders. Customers can also see their own order size in the data window and allow other customers to click on the order. And opening an account on the formal ECN platform requires strict agreement and identity authentication, and requires funds for third-party supervision. At the same time, the leverage ratio will not be very high, generally not more than 20 times.
Second, the profit model of foreign exchange trading platform
1.DD or market maker
Market makers make profits through spreads, and when necessary, they trade in reverse with customers to make profits from gambling. For example, if you want to buy a certain amount of EUR/USD from DD foreign exchange broker, the broker will first find the equivalent order from its customers to sell EUR/USD, or directly hand over your order to the bank. However, if there is no order in the opposite direction to match your order, they will trade with you in the opposite direction.
2.NDD foreign exchange trading platform
( 1)ECN
The spreads of ECN trading platforms are all floating. Among several brokers, only ECN brokers collect commissions from traders, which is the only way for ECN brokers to make profits, because ECN brokers do not make profits through spreads.
(2)STP
As an intermediary, STP brokers send all traders' orders to the bank, and the bank sends the price difference information to STP brokers. After receiving the spread information, STP brokers have two choices: one is to fix the spread, and the other is to choose the best buying price and selling price (the more the better) from several banks to make the spread float.
So how do STP brokers make a profit? STP brokers, like ECN, do not trade with traders. They added a little to the spread they got from the bank. For example, add a little or half of the price difference to the lowest selling price offered by several liquidity providers, and subtract a little or half from the highest buying price offered. STP brokers earn this profit by adding points, and then send all the traders' orders to the bank at the actual price.
In other words, the trader's profit or loss can't promote the broker's profit at all. What they care about is the frequency of your trading.
3. Mixed STP mode: DD+NDD
Many straight-through processing brokers use the mixed straight-through processing mode.
STP brokers will sign commercial contracts with banks, which stipulate the minimum transaction scale acceptable to banks. Generally speaking, for larger orders (usually ≥0. 1 lot), STP brokers will send the orders directly to banks.
Orders with small transaction amount (generally ≤ 0. 1 lot) are not accepted by banks, so the trading platform will not send them directly to banks. So how do STP brokers handle such orders? At this time, they adopted the DD processing platform model to hedge within the platform. For mini-accounts, this kind of mixed STP broker basically does this.
DD/MM brokers are the most distinctive, making profits through spreads and relying on traders to lose money, because brokers can hedge. In other words, the more the trader loses, the more the broker gains. -This is what we commonly call a "gambling platform".