STP & ECN Brokers – Understanding the Key Differences for Traders
Picking a well-matched broker is a critical decision for traders, and in the world of Forex, two commonly used categories of brokers stand out: Straight Through Processing (STP) and Electronic Communications Network (ECN) brokers. Both have unique privileges and drawbacks, making it clear for traders to discover the differences and pick the one that positions their trading needs.
Two Distinct Broker Groups
Forex brokers operate under two main execution models: dealing desk (DD) and non-dealing desk (NDD). These models dictate how orders are executed in the market.
Dealing Desk Brokers (DDs)
Also known as “market makers,” DDs process orders through a dedicated dealing desk operated by the broker itself. These dealers may receive or reject orders based on several factors, including price variability and news reports. If a client’s trade cannot be matched with another one’s, the DDB may take the counterpart.
Non-Dealing Desk Brokers (NDDs)
In contrast, non-dealing desk brokers directly send customer orders to the interbank market. NDDs use Straight-Through Processing or Electronic Communication Network technology to move orders straightforwardly to liquidity providers (LPs), enabling faster and more competitively priced order accomplishment by granting direct entry to interbank markets.
DDs typically profit from the margin cost they charge for buying/selling and take the opposite side of their client’s trades, essentially gaining income when their clients lose. NDDs, on the other hand, either pass on liquidity supplier trading margin to clients or bill for access to these LPs.
STPs
STP model is widely used in the economic industry and by large enterprises to streamline financial transactions by automating the trading cycle, reducing human errors, and saving time. Initially developed for shareholding trading markets in the early 1990s, STP operates in real-time, sending orders straightforwardly from traders to various LPs in the interbank market. STP offers myriad benefits, including faster cycle times, reduced settlement risks, and lower expenditures.
ECNs
ECN brokers automatically employ ECNs to match trading orders for various financial assets. This platform connects prominent ECN systems to major brokers, individual traders, and LPs, facilitating direct trade execution without intermediaries. ECNs prioritise trader anonymity during transactions, extend trading access beyond conventional hours, offer lower markups, faster order accomplishment, improved liquidity, and enhanced price clarity.
Key Differences
How do these brokerage models differ, and which one should you choose?
Order Routing: ECNs ensure direct transmission of orders to the centralised interbank market, while STPs may forward orders to other STPBs, market brokers, or ECNs—however, neither processes orders through a DD.
Compensation Structure: ECNs charge a modest fee for performing trades, while STPs derive revenue from commission fees and price differences. STPs may offer clients the option of variable or fixed markups.
Speed: ECNs guarantee the fastest trade accomplishment due to their direct connection to LPs, whereas STPs may experience slight delays when routing orders through intermediaries.
In conclusion, whether you opt for an ECN or STP broker depends on your specific trading preferences. ECNs offer lower long-term costs with low spreads and ultra-fast finalisation, while STP accounts grant fast trading speeds and a favourable trading environment. To ensure you select a trustworthy partner for your trading journey, remember to look through the regulatory status of the candidate broker and client feedback.
