Who are DMA or STP brokers and how do they work?

If you have been around the retail forex trading circuit for a while, chances are that you came across different acronyms. Chances are that for the layman, terms such as DMA, STP, Market maker and so on might be very confusing. Many beginners in forex trading tend to ignore these terms that seem complicated.

But it is essential that you as a trader pay attention to these terms. Although acronyms such as DMA or STP might sound out of this world, they are very simple. Learn what these terms mean in this article and understand how they apply to you as a trader.

What is a DMA or STP forex broker?

The first question that might come to your mind is the context in which these terms apply.

DMA and STP relate to the way your trading orders are routed or executed. As you might know, your trading order can be handled in multiple ways.

Firstly, your order could reach a dealing desk, where through complicated algorithms, the orders can be handled in-house. Meaning that your forex broker because your counterparty.

Similarly, another way your forex trading order can be executed is when it is passed directly into the market liquidity pool without any intermediaries.

Many traders prefer that they trade with a broker that executes orders without intermediaries such as DMA or STP.

DMA stands for Direct Market Access, while STP stands for Straight through processing. Lets first look at the meaning of STP. As the name suggests, straight through processing is a term that is applied when something is automatically processed (or in our case, a trade is executed) without any manual intervention.

Straight through processing simply means that when you place a trade, your trading order is executed automatically. Therefore, with a DMA or an STP broker, the forex broker you are trading with does not interfere with your orders.

Is DMA or STP forex broker better than a dealing desk broker?

The answer to this is subjective and depends from one trader to another. There are a lot of things to consider here. Firstly, if you are trading with a small deposit of under $1000, then trading with a dealing desk broker might be ideal.

This is because the costs for trading are much lower. Many dealing desk brokers offer a fixed spread for you. This means that depending on your contract size (lot size), you will know how much spread you will pay to make a trade.

On the other hand, when trading with a DMA or an STP broker, you are charged a commission on the trading. This cost is usually priced in dollars per contract. The general convention is that DMA or STP brokers charge you a commission per 10 lots.

If you are an experienced trader and your strategy requires you to trade or speculate, making quite a few trades, a DMA or STP broker might be more suited to your needs.

Another factor to bear in mind is that with fixed spread or a dealing desk broker, you will be limited in far away from the market price you can place a pending order. This is not the case with a DMA or an STP broker. Of course, on the flip side, there is a good chance that your pending order with a DMA or STP broker will not be executed at the exact price you mentioned.

This depends on the liquidity providers that the DMA or STP broker has. The general rule of thumb is that the larger the liquidity pool is, the better your chances of a good fill on your pending orders.

Limitations on trading with DMA/STP brokers and other broker types

There are a few points to bear in mind when it comes to trading with the DMA/STP broker and other dealing desk brokers. Firstly, a fixed spread or a dealing desk broker will not allow news trading or when volatility is high.

This is because spreads tend to widen during higher volatility periods. One can see this usually close to a big news even such as the US nonfarm payrolls report or central bank decisions.

On the other hand, you can easily trade such volatile events with a DMA/STP broker. But the difference here is that due to the variable spreads, you might be facing a larger than normal spread during such volatile events.

Therefore, traders need to assess the trade off when it comes to trading with a DMA/STP broker comparing to a non-dealing desk broker. Lastly, if you are into trading exotic currency pairs, you will find the spreads to be much higher with a DMA/STP forex broker. This is because there is not much liquidity in the markets and you are forced to buy or sell at wider bid and ask prices than normal.

DMA/STP forex brokers – In conclusion

To conclude, we have learned what is a DMA/STP forex broker and how they differ from a dealing desk broker. There are both pros and cons when dealing with such broker types. Many think that a dealing desk broker is out there to rip off the trader’s money, but that is not the case.

Given all the points mentioned in this article, one should take a good look at various factors ranging from the deposit amount to make, to your trading strategy and your most commonly traded instruments to see which of the above two forex broker types are more suited to your needs.

Read 394 times Last modified on Tuesday, 07 April 2020 16:41