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A hybrid model of operation is when a broker divides its flow into different categories.
Some clients are routed to an Electronic Communication Network (ECN), while others are matched internally or the broker is taking the other side of the trade.
Many forex brokers rely on a hybridized model for processing client transactions.
This approach does provide several inherent benefits as they provide traders the best of both worlds if they think a combination of models would work best for their trading strategy.
Benefits of a Hybrid Model
One inherent advantage of a hybrid model is the relatively low error rate associated with operation.
Hybrid models control for human error, since this element is effectively removed from the execution process.
Further benefits are provided through account diversity. FX brokers often offer one type of execution for certain accounts, with additional type for other accounts.
For example, large volume traders can open up an ECN account, while smaller lot traders have to go through a dealing desk since large liquidity providers often have no interest in transacting small amounts.
A common example of a hybridized strategy involves melding the ECN or Direct Market Access (DMA) and (Straight Through Processing) STP models together to create a fully electronic forex dealing service.
This useful combination enables FX brokers to fully automate the order entry, dealing spread pricing, and trade execution aspects of their deal execution business.
Hybrid models of operation have become particularly popular in recent years as technological and risk management solutions have become more sophisticated and advanced.
As such, these factors allow brokers to mitigate classical risks from negative balances, while maintaining internalization of flow in order to capture a larger Revenue Per Million (RPM).