However, at times, and in the event that it fails to hedge your trade, it will have to take the opposite side of your trade just as a dealing desk broker would. An NDD broker usually does this through an algorithm and not an actual human trader in its office. Some brokers claim that they are true ECN brokers, but in reality, they merely have a straight-through processing system. NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask prices.
This is another way of making money for NDD brokers. Participants could be banks, retail traders, hedge funds, or even other brokers. In essence, participants trade against one another by offering their best bid and ask prices.
ECNs also allow their clients to see the "depth of market. Because of the nature of an ECN, it is very difficult to slap on a fixed markup, so ECN brokers usually get compensated through a small commission. They just have to take the opposite side of your trade sometimes.
So with a dealing desk, there are people making those hedging decisions, but without a dealing desk, they have some algorithm that still does the same. A NDD broker still uses an algorithm to not only match your trades, but also make the market, just as a DD broker does. Our Beginners Video Course is for you! This article was originally published on InvestDiva. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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