This post is from another board but has some good info:
There are many keys to understanding the Forex markets, and there are many parallels between the Forex markets today and the stock market back in 1995 and 1996 when ECN technology like ISLD and ARCA were coming about. The non-deal-desk system is the really the beginning step of the process of making the Forex markets a truly "transparent" market with "best pricing" available electronically straight to the customer. In order for there to ultimately be a true market for Forex (such as exists for stocks and futures); companies will need to take several steps to move away from the traditional (and rigged) deal desk systems. I'd like to discuss many of those steps now.
I do want to say up front that I work for a non-deal-desk platform (EFX GROUP / MBTF). I don't want there to be any confusion about that. If someone thinks that any of my points are biased because I work for a NDD platform and not a traditional deal desk platform, I'd be happy to discuss it with them here or in private, and I will respond to any comments/questions.
These are the things that I think separate a true NDD platform, such as ours, from other platforms, and then I have some comments about the Forex market and the average Forex trader beyond that.
Direct access to the biggest piece of the market possible. This is really the key to it all. A deal desk is basically a trader trading against a professional on a desk who can decide when and when not to sell to them. An NDD platform, before everything else, has no one working for the platform whose job and income are based on making money against the clients of the firm. When we execute a trade, it is executed purely electronically, without bias, without human intervention, and at the best price that our system could find at the time. I think this little fact is something that people overlook. We are paid on the commission on the trade, just like in the stock, futures, and options markets. Our incentive is therefore to get the best price possible to keep the customers happy. Deal desk platforms operate in an entirely different manner. They only make money when the clients lose money. Playing with a deal desk is like gambling in Vegas. It always favors the house because of the spread. They control if and when you get executed. We have interest in the spreads being tight and the executions being the best that they can be. In fact, the better that we do for our clients, the better that we do overall.
Execution should be no different whether you are closing or opening a trade. Many of the traditional deal desk platforms separate positions as "open" versus "closing," which is what leads to something like "hedging." The reason that they do this is because they believe that the average Forex client loses 6.7% per month in Forex (NOTE: that is the average based on their system, which means some people make and some people lose). Therefore, when someone is closing a position, they usually just accept the other side. When someone is entering a position, they might not. Why should this be the case? Why should someone who is long the EURUSD and selling it get a better fill than someone who is shorting the EURUSD at the same moment? They shouldn't. I'll talk about hedging in a moment.
A related point here is therefore anonymity. The system should not care where the trade is coming from. It should not care whether that person is starting a new position or closing an existing one in the same direction. Try opening an account with a deal desk platform and trading for six months. If you are making money, then open a second account under a different name. Try to buy in both accounts at the same time. The new account will get filled, while the account that is making money might get slipped or requoted at the same moment. Why is this the case? Because the platforms (all of them) profile their clients, trade against them, and make sure that the clients who are making money start to get worse fills. Remember that if you were the guy on the desk and you took the opposite side of every trade, you would want to slow down the people that were making money too because they are making money against you by default. A true NDD platform shouldn't care who the trade is coming from when it executes. I can tell you right now that when it comes to the EFX GROUP / MBTF system, a sell order to close a long position and a short order that are put in simultaneously on the EURUSD will be filled at the prevailing market price together, period.
No requoting. Deal desks mark certain accounts as "A list" clients. This means that the clients are good traders that are showing signs of being successful. "B list" clients are the rest of the client base. "B list" clients are set to auto-execute against the platform because they lose on average. "A list" clients are not. In fact, "A list" clients in a fast market are often shown pop-up windows that say "The price is no longer here, would you prefer to pay this price." NDD platforms never requote. Either the order is marketable, or it isn't.
A non-deal-desk system lets you know everything that they are making off of you. Would I rather trade on a deal desk, where I spend 3 pips to buy the EURUSD, and then later, 3 pips to sell the EURUSD, or would I rather trade on a system that lets me get executed by the true market, which includes customers and banks, with the narrowest spreads possible, and get charged a fee. The answer is the latter.
ECN vs. STP vs. Deal Desk. It needs to be made clear that there are really more than two types of platforms. A deal desk is a fixed spread platform where the desk makes their money in the spread trading against all of their customers. This rigs the market against the retail trader because they aren't seeing true market quotes. The platform can move their quote wherever they need if they want to fill the client. STP (Straight Through Processing) platforms execute directly from the retail client to the banks. The more banks and liquidity in the system, the better the fills for the customer. ECN (Electronic Communications Network) platforms let customer orders interact with other customer orders. Non-deal-desk (NDD) platforms are either the second or third type of platform. EFX GROUP / MBTF are both. We have over a dozen banks in our network which customers execute against directly (STP), but we now also allow customers to hit other customers (ECN) inside of the standard pip increments of the banks. We do not shave anything against customer executions.
