DMA/STP Forex brokers offer Direct Market Access (DMA) through Straight Through Processing (STP) protocols in their trading platforms. Direct market access allows brokers to connect their terminals directly to a liquidity provider so that all client orders are directly passed on to the interbank without the help of a dealing desk. DMA brokers work on a no-dealing desk model that prevents brokers from processing client orders through a backend dealing desk, which is vital for traders to trade the markets under real market conditions without any conflict of interest.
DMA/STP brokers as such do not have a conflict of interest with their clients, but such brokers might connect their traders to a different broker with a larger liquidity pool, which doesn’t necessarily need to be a bank or exchange. The Forex market works by satisfying the demand and supply of the currency pairs in the global markets, which requires both buyers and sellers to be available to complete a round order. Most market makers and dealing desk brokers find it hard to find both parties to take the opposite end of a position, which might force them to fill their client’s order by taking the opposite end of the trade themselves. Therefore, a broker gains when a trader loses, and vice-versa.
How Are DMA/STP Forex Brokers Better Than Dealing Desk Brokers?
DMA allows brokers to stream accurate price feeds without any delays. Since DMA/STP platforms are connected directly to the liquidity providers through dedicated bridges, traders can witness the actual movements in the markets and an accurate representation of the real market value of currency pairs. Orders are also placed instantaneously at existing market price, which prevents any instances of re-quotes. There is also a better probability of filled orders, as traders can tap into the higher liquidity provided by the liquidity providers and banks.
Dealing desk brokers are sometimes forced to take the other end of trades, and in such instances, a broker can decide whether to fill an order or not. That is the reason why most market makers and dealing desk brokers display many re-quotes during regular trading hours. Traders might find it annoying and sometimes even dangerous to receive re-quotes, especially if they are trying to close a position that has the potential to induce a substantial drawdown.
Traders can enjoy better peace of mind and can also feel more secure while trading with DMA brokers due to the relative lack of conflict of interest with their brokers. DMA Forex brokers profit from the spreads that are charged on each position, and most DMA FX brokers don’t indulge in any scam practices to trick their traders. Therefore, DMA brokers are usually more preferred by a significant percentage of retail as well as institutional traders.
What Are The Core Features Of DMA/STP Brokers?
DMA brokers offer pretty standard Forex trading services that are in line with the expectations of a majority of retail traders. However, DMA/STP brokers take a step further from STP brokers as conventional STP brokers may act as market makers, while DMA/STP brokers act more like ECN brokers without the associated trading conditions. Here are a few facts about DMA/STP Forex brokers:
- DMA brokers allow traders to indulge in any trading strategy, and will not prevent traders from hedging, scalping, or any other short-term/long-term strategy that is adopted by the trader. Since DMA brokers earn their income from spreads and markup, trading style shouldn’t matter to these brokers.
- DMA brokers can stipulate minimum deposit requirements and also require traders to adhere to certain terms and conditions. Since DMA/STP accounts are more expensive to maintain from a broker’s perspective, brokers might require traders to maintain an active trading account. In case traders fall behind on their trading volume, brokers might charge a maintenance fee for account inactivity.
- STP brokers might issue re-quotes once in a while if there isn’t enough liquidity in the market; however, DMA/STP brokers will not have any re-quotes. Since traders are connected directly to the liquidity pool, most orders are filled entirely, but if there isn’t enough volume in the markets, DMA/STP trades might also be filled partially according to the liquidity available in the markets.
- DMA/STP accounts are subject to slippage, and traders can experience both positive as well as negative slippage while entering trades. Since there isn’t any lag in order executions, traders should account for slippages in their trading.
- DMA/STP guarantees faster execution of trades. All market orders are sent to the global pool, which virtually guarantees a position regardless of the market volatility.
- DMA/STP accounts have tighter spreads than regular STP accounts, but spreads are not as low as offered by regular ECN accounts. Some brokers might also charge a nominal commission for a DMA/STP account, which can be lesser than an ECN account.
- DMA/STP accounts do not have a fixed spread, as the markup from the liquidity providers vary according to the market conditions. Fixed spreads are usually provided by dealing desk brokers that have the freedom to determine their price and markup, as all orders are satisfied and processed at the broker level.
- Standard STP brokers don’t provide market depth information on their platforms, but DMA/STP brokers mostly offer this information. Market depth information is typically provided with ECN accounts as well; therefore, DMA/STP should provide the best compromise between regular STP and ECN accounts.
Are There Any Drawbacks With DMA/STP Forex Brokers?
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There aren’t many drawbacks with DMA/STP FX brokers, but traders who have been trading with dealing desk brokers will find DMA trading to be incredibly faster and highly cost-effective. DMA trading involves trading the market directly according to live price feeds; hence, traders cannot be complacent in their trading by counting on being protected by a re-quote. For instance, all orders are filled quickly, and there is no guarantee that orders will be placed at the same price as expected by the trader.
DMA/STP accounts also involve a small commission, and the spreads can vary. Sometimes, market conditions might result in extra-large spreads, which can initiate margin calls for accounts that are using a higher margin. Therefore, trading with leverage will lead to drastic losses, which can increase the drawdown.
A majority of DMA/STP brokers require a higher capital requirement to compensate for a lack of revenue from spreads and active trading. DMA accounts also involve trading with standard lots, which requires a higher margin. Therefore, traders will find it difficult to open regular DMA accounts without access to a higher trading capital
DMA/STP accounts are certainly useful for retail traders who are looking to make a good amount of money in the markets without any intrusion from the brokers. DMA offers transparent trading conditions that enable traders to invest in the markets as it is meant to be.