Let’s consider them in more detail.
Type 1. Dealing Desk Forex broker
In this case, a broker can match orders of his customers together. One customer buys EUR / USD and another sells it. The broker executes both orders making money on the commission fee and / or spread.
If an order, which comes from one customer, doesn’t have an offsetting order, which comes from another customer, the broker can:
- Bring the trade to the interbank, where an offsetting order will be found for sure.
- Play the market maker role by himself. In other words, the broker will execute the customer’s order by opening an offsetting order on his own account. If the customer constantly trades in the black, the broker will have accumulated losses. This is how a conflict of interests arises.
Specific features of DD (Dealing Desk) brokers:
- the customers receive quotes from the broker’s server rather than from the interbank;
- fixed spreads are inherent.
The ‘being own market maker’ scheme of business has been well-known since long ago. Bucket shops flourished in the United States as early as at the end of the 19th century. These were shops where gamblers bet on stock price growth / fall (the photo below shows the Haight & Freese bucket shop in Manhattan in 1899).