Difference between broker and dealer trading places

It is the highest price that a currency pair will be bought. And a price of quote currency selling is called ASK. It represents brokerage service costs and replaces transactions fees. Spread is traditionally denoted in pips — a percentage in point, meaning fourth decimal place in currency quotation. Following types of spreads are used in Forex Trading. Fixed spreads are set by dealing companies for automatically traded accounts. Fixed spread with an extension — certain part of a spread is predetermined and another part may be adjusted by a dealer according to market.

Variable spread — fluctuates in correlation with market conditions. Generally variable spread is low during times of market inactivity approximately pips , but during volatile market can actually widen to as much as pips. This type of spread is closer to real market but brings higher uncertainty to trade and makes creation of effective strategy more difficult.

Observing variable spread graph trader could define moments when value of the spread reaches its extremes — either maximum or minimum. On the moment of minimal spread between 0 to 1 pips he or she can open simultaneously buy and sell positions and later close both of them on the moment of maximal spread. With the improvement in communications technology in the late 20th century, the need for a physical location became less important and traders started to transact from remote locations in what became known as electronic trading.

Set up in , NASDAQ was the world's first electronic stock market, though it originally operated as an electronic bulletin board [ citation needed ] , rather than offering straight-through processing STP. By investment firms on both the buy side and sell side were increasing their spending on technology for electronic trading.

Traders also increasingly started to rely on algorithms to analyze market conditions and then execute their orders automatically. The move to electronic trading compared to floor trading continued to increase with many of the major exchanges around the world moving from floor trading to completely electronic trading.

While the majority of retail trading in the United States happens over the Internet, retail trading volumes are dwarfed by institutional, inter-dealer and exchange trading. However, in developing economies, especially in Asia, retail trading constitutes a significant portion of overall trading volume [8]. For instruments which are not exchange-traded e. US treasury bonds , the inter-dealer market substitutes for the exchange. This is where dealers trade directly with one another or through inter-dealer brokers i.

They acted as middle-men between dealers such as investment banks. This type of trading traditionally took place over the phone but brokers moved to offering electronic trading services instead. Similarly, B2C trading traditionally happened over the phone and, while some still does, more brokers are allowing their clients to place orders using electronic systems. Many retail or "discount" brokers e. Charles Schwab , E-Trade went online during the late s and most retail stock-broking probably takes place over the web now.

Larger institutional clients, however, will generally place electronic orders via proprietary electronic trading platforms such as Bloomberg Terminal , Reuters Xtra , Thomson Reuters Eikon , BondsPro, Thomson TradeWeb or CanDeal which connect institutional clients to several dealers , or using their brokers' proprietary software.

For stock trading, the process of connecting counterparties through electronic trading is supported by the Financial Information eXchange FIX Protocol. With the advent of electronic trading a new class of brokers has appeared: They offer their clients including retail an electronic platform that allows for a direct access to the exchange as opposed to more traditional online retail brokers, which are just an electronic IB. DAT brokers usually offer to retail investors low transaction costs and high execution speed.

I hope I have not forgotten anything. If so, please let me know in the comments. In a next post I will investigate how the various automated trading platforms fit into that model. I realize this post is almost 7 years old, but I want to thank you for writing it. Notify me of followup comments via e-mail. Sy blog, Systematic Trading research and development, with a flavour of Trend Following. Past performance is not necessarily indicative of future results. Futures trading is complex and presents the risk of substantial losses; as such, it may not be suitable for all investors.

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