Understanding Bridge Systems in Forex Trading

Forex brokers act as intermediaries between traders and liquidity providers. They play a vital role in the forex industry, enabling retail traders to access the forex market through their services, even with limited capital.

The main task of a broker is to relay traders' transactions to liquidity providers using a system or technology known as a "bridge." This bridge system acts as a channel, connecting traders to one or more liquidity providers.

The process starts when a trader places a buy or sell order through the trading platform. The broker receives the order on their platform, and the bridge captures the transaction to forward it to the liquidity provider. The liquidity provider then executes the order, and the results are sent back through the bridge to the broker, who then relays them to the trader's trading platform.

There are two types of bridges used by forex brokers, namely STP and ECN.

STP (Straight Through Processing)

STP, or Straight Through Processing, is a bridge system that allows brokers to forward traders' transactions directly to a specific liquidity provider, resulting in faster processing. However, the downside is that the obtained order prices may not be the best available. Also, because it's connected to only a specific liquidity provider, the execution process may be significantly affected during high market volatility, leading to requotes for traders' orders.

It should be understood that the STP system may or may not be connected to multiple liquidity providers. Some STP brokers may have agreements with several liquidity providers, while others may have a connection with only one liquidity provider. When multiple liquidity providers are involved, the STP system can select the best available price from among them for the trader's transaction.

ECN (Electronic Communication Network)

ECN, or Electronic Communication Network, is a bridge system that connects brokers with multiple liquidity providers to form an internal pool of liquidity. This system will direct traders' transactions to various Liquidity Providers (LPs) within the ECN network to obtain the best prices. As a result, transaction liquidity is better maintained, even when market volatility decreases. However, because of this, the bridge system needs to calculate prices from multiple LPs to generate the best price, which can make the transaction process slightly longer compared to the STP system. Moreover, the ECN system is a more advanced version of the bridge than STP, which is why transaction costs charged to traders are usually higher.

What about DMA brokers? Aren't there brokers out there that offer direct access to the market?

As for DMA (Direct Market Access) brokers, there are no retail forex brokers that offer direct access to the interbank market or DMA. DMA systems are more commonly used in stock or futures trading, where some brokers may offer direct access to exchanges or major markets.

The interbank market caters to large financial institutions, commercial banks, central banks, and other financial entities. It operates specifically for trading among these major institutions and involves transactions in very large volumes, often reaching billions of dollars. In contrast, retail forex trading through brokers generally involves much smaller transaction volumes.

To participate directly in the interbank market, financial institutions must have substantial capital, sophisticated technological infrastructure, and reliable systems to handle large transaction volumes and execute trades quickly, often within seconds. Such capabilities are typically only possessed by large financial institutions. Therefore, it is not feasible for retail forex brokers to provide true direct access to the actual interbank market.

Thus, retail brokers offering DMA do not exist, except for stock trading brokers. Any brokers out there labeling themselves as DMA are likely dishonest and employ deceptive tactics to attract consumers. Such brokers should be avoided as they do not uphold good business ethics.

Reference: Traders Family. February 2021. "Johnpaul77 Buka 'Jeroan' Broker Forex Bandar (True Story)." Accessed on July 24, 2023. Available at: https://youtu.be/3TBGDy7-O_o

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