Bridge in Forex Industry and How It Works

As a common term in the forex market, bridge is indispensable in accessing liquidity. Here comes the question: what is a bridge and how does it play a role in forex trading? Fazzaco would like to detail the definition and function of a bridge as follow to help you have a better understanding of the forex market. You can find more bridge related vendors and information at https://www.fazzaco.com/company/5dfc6875a9c29000013f5a8f

Definition

Defining bridge is not rocket science, but to understand it we must start with the two categories of retail brokers. In the forex market, retail forex brokers fall into two types:

Dealing Desk (DD), where the broker becomes the counterpart of the investors and execute orders and keep the position in an inner liquidity pool. When the clients suffer losses, the broker makes profits. In other words, a DD broker doesn’t transfer client orders to inter-bank market of liquidity providers. Its quotes is unrelated to the trading volume; and

Non-Dealing Desk (NDD), where the broker simply transfers orders to the interbank  market and would not risk being a counterpart of its clients.

It known to all that MT4 and other trading software are designed for DD model, which only allows the trading between clients and brokers. But a huge amount of brokers and clients still want to access the liquidity in the inter-bank market, thus the demand arises: to connect trading software and brokers to liquidity providers, bridge technology is introduced.

Bridge technology connects MT4 servers and liquidity providers, thus integrating forex brokers, orders, and liquidity (in the interbank forex market). An order can be sent from a forex broker to liquidity provider through a bridge. In essence, all bridge products center on quotation and transaction, although their connecting models and features may vary.

Models

NDD brokers can be divided int two types, i.e STP and ECN, with corresponding bridge technology to adapt with.

STP

STP stands for “straight through processing”. Brokers under this model will pass on orders directly to liquidity providers and banks. STP accounts require not commission, and a fixed spread is usually adopted as the only way for a broker to make profits.

ECN

ECN stands for “electronic communication network”. Brokers in this category allow  clients have access to the interbank market (the primary exchange market) and to see the actual prices of other parties that are trading as your counterparts, such as banks, other brokers, non-bank financial institutions. Spreads may vary significantly and negative spreads may occur. ENC brokers make profits from commission instead of spreads.

There are several differences between ECN bridge and STP bridge. With ECN bridge,

Clients can check market depth;

Orders can be partially executed; and

Orders can enter the market as what they are.

Advantages

Client loyalty

For retail brokers, bridge solution can enhance client loyalty by executing orders more rapidly and effectively. Clients are not trading with brokers, but can access the global forex market.

Stability

The scalability and reliability of a bridge is the key to trading and order execution. Any bridge with a latency of multiple miliseconds is unacceptable to clients. If a broker wants 24-hour access to international market on every business day, it needs a powerful bridge as backing.

Lower Risk

Bridge technology is not restricted to a certain type of broker, but as an increasing number of skilled clients start using algorithm trading, many brokers don’t want to risk being a counterpart of clients. Hence, many of them are now providing STP or ECN models, or even both. Industry insiders suggest that bridge technology enables more information transparency and effectiveness for brokers to make favorable decisions. 

Increased Profits

Bridge is not merely about establishing a “bridge” but also includes flexible order routes, customer information, administration and operation, liquidity management, etc. It is designed to save time cost for brokers in operation and risk management. Particularly, some bridge solution may allow brokers to monitor slippage and trading on a real-time basis to maximize their profits.

Bridge, as the name suggests, connects investors to interbank market and individual orders to global forex market. As the COVID-19 pandemic remain rampant across the world, surging trading volume may bring more challenges to bridge technology.