Principal vs Riskless Principal vs Agent (MM vs STP vs DMA)

While Market Maker definition is easy to understand, other dealing models, starting with STP, become more difficult to comprehend in full depth of "What is actually happening to your trading Orders" and "What position does your Broker take"?

Let's review the Legal Status of the Forex Brokers as seen in the legal documents, such as Client Agreements, Execution Policies and other, and the actual dealing model it corresponds to:

Legal Status	Dealing Model	Conflict of Interests	How it Works
Principal	Market Maker	High	Is the sole and final Counterparty to your trade (B-book dealing)
Agent	Pure Agent STP (rare)	None	Is never a Counterparty to your trade, but rather immediately passes all orders to another Forex Broker (A-book dealing)
Riskless Principal	STP (most brokers)	Low to None	Is the sole Counterparty to your trade that immediately hedges all risks with other liquidity provider(s) (A-book dealing), while quoting to you an aggregate synthetic price derived from multiple Liquidity Providers.
Riskless Principal	DMA (rare)	Low to None	Is the sole Counterparty to your trade that immediately hedges all risks with another liquidity provider - one-at-the-time (A-book dealing), while quoting to you (giving you access) to the live LeveI II pricing from live Market Order Book. In other words, you are interacting directly with the market (in this case, directly with a specific one-at-the-time Liquidity Provider through your Broker).

The Legal Status vs Actual Operational Dealing Model

To understand why a Forex broker can be legally a "Principal" in the Client Agreement, while still offering STP execution, we have to look at the "Riskless Principal" model, also known as "Matched Principal":

• The Legal Status: Principal
  When you open a trade, you are entering in a contract with your Forex Broker. The Broker acts as Principal, and is your direct Counterparty. In this contract, you don't own the underlying asset, but rather a Contract for Difference (CFD), and the broker is the one who issued and sold it to you.


• The Actual Operational Dealing Model: STP (Riskless Principal)
  While being a Principal on the Contract, the Broker acts as a Riskless Principal (or Matched Principal) when it comes to market risks.
  How it works?
  The moment you click to "Buy" or "Sell" the Forex Broker automatically opens an identical position with the Liquidity Provider(s). This way the broker instantly offsets every trade you make and have zero market risks. The Broker has no conflict of interest and profits on markup or commission from each trade, regardless whether you win or lose.

Why Pure Agent STP are Rare?

There are legal and operational barriers to be Pure Agent STP in Forex.
1. Regulation: Certain jurisdictions specifically indicate that a Broker must be "an issuer of the Contract for Difference". This means a Broker must be a Principal.

2. Lot aggregation: Being a Principal, a Forex Broker is able to offer fractional lot trading (0.01 lot or less) to its Clients, while aggregating these lots into larger sizes to be hedged with the Liquidity Providers. An Agent cannot easily achieve that.

Difference between Riskless Principle (STP) and Riskless Principle (DMA)

DMA is a specific type of Riskless Principal, but not all Riskless Principal execution is DMA.
The main difference is how the trade is actually executed and what Traders see on the screen.
The Key is: Who Makes the Price?

In DMA: You are a Price Maker.
You get access to the live Market Order Book. When you place a Limit Order, your order appears on the Market Order Book for others to see. This is a direct interaction with the Market.

In Standard STP: You are a Price Taker.
This is when your Forex Broker shows you a synthetic price - an aggregated quote derived from multiple Liquidity Providers. When you click to "Buy" or "Sell", the Broker acts as Principal to fill your order and then simultaneously fill themselves with a Liquidity Provider. You never interact directly with the Market Order Book yourself, instead the broker does it for you.

Standard STP vs DMA and Price Origin

Name	Standard STP	DMA
Legal Status	Riskless Principal (Counterparty)	Riskless Principal (Counterparty)
Price Origin	Level 1 only (One Bid/Ask price only), which is an aggregated synthetic price	Direct prices from the Marker Order Book
Market Depth	Traders see Top Book only	Level 2/DOM (All Bid/Ask prices - full Order Book visibility)
Order Visibility	Only your Broker can see it	All Market participants can see it
Platform	MT4 is insufficient for a full DOM and volume display, as well as speed	MT5, cTrader, L2 Dealer etc, are built for Level 2 pricing
Broker Profits	Commission or spread mark-ups or both	Commission only (as a rule)