STP/ECN Brokers

In short, there are no liaisons or mediators that go between the STP brokers and the liquidity providers. Because of the direct transactions involving the two providers (STP brokers and liquidity providers), this makes the electronic platform of brokers as STP.

Since there will be no mediators involved in the transaction process, STP brokers are able to satisfy their clients’ need by processing the orders right away. Also, STP brokers do not need to send the re-quotes back to the clients, because in the first place, the STP brokers themselves are the ones who make transactions directly with the liquidity providers. This, in turn, becomes very advantageous for the STP brokers because clients are then allowed to do some trading businesses, without restrictions, even during the times of release of financial news.

As an exchange market belonging to the top level, banks are used by many STP brokers as their liquidity providers in order to do transactions on the interbank market. In line with that, when there is an increase in number of liquidity providers, it also means an increase of client recruits. This means then that the market becomes better especially for STP brokers.

Why brokers use STP

It is wise to realize that when clients lose their profits, brokers do not actually profit from it. Therefore, brokers always want their clients to succeed as it is through that wherein they will also gain a lot. Brokers choose to be STP brokers because for one, they are almost always preferred by a lot of traders and investors. Since STP brokers do not utilize dealing desks, it also means that they do not need to spend more money for the salaries of their staff. If there are less number of staff, it means fewer expenses. Although there are less staff, it does not mean that the business transactions and processes involved are compromised as the STP brokers themselves are the ones doing the transactions. With the less number of staff, STP brokers are well compensated especially when it comes to the spread of its market with the help of the liquid providers involved in every trade. Since most STP brokers prefer to use banks as their liquidity providers, wherein fixed spreads are offered, STP brokers are able to provide both fixed and variable spreads to its valued clients.

STP brokers always earn something once their client makes a trade using an STP platform. Furthermore, STP brokers add a little increase over the spreads they receive from their liquidity providers when quoting an ask rate because STP brokers do not engage in trade against its client orders. The little increase is then added on top of the bidding price the STP brokers receive from the best bid liquidity providers before they pass the rates to their clients. After that, the clients confirm their orders using an electronic platform or an STP platform of the STP brokers, and then the rates are sent to the liquidity providers at a higher or lower rate, depending on the bid. With that, STP brokers carry out the same orders with that of the client, of course at a better price.

Why traders trust STP brokers

STP brokers are oftentimes trusted by the traders because of its transparency. It is a high risk when traders invest into something that can either be a true market or just an artificial one. Since STP brokers do not employ dealing desks, traders then choose to trade with them because of the fact that STP brokers are true brokers.

Traders who execute their investments with STP brokers usually have their trades filled immediately. This means that there are a lot of competitive markets out there who keep on bidding and offering through the liquidity provider.

Lastly, traders trust STP brokers because of the anonymity that it provides with the clients. Since it uses the No Dealing Desk method, wherein no mediator is involved, the clients’ orders are executed right away without exposing the clients’ personal details as well as the transaction of orders.

With a live DOM, investors are able to see everything including the bid and ask fares that are available in banks, market makers, hedge funds and even individual investors. These bids and ask fares are those that are presently available at that point in time. In line with that, ECN brokers are able to let their clients see the status of their orders — where their orders are placed or who hit their orders. With that being said, other traders are actually allowed to hit on those orders. This is what is meant by the transparency that ECN brokers provide. Needless to say, traders can take a look at the liquidity, and they can also execute some trades.

Among all other forex brokers, ECN brokers are considered to be the purest breed because of the full transparency of the transaction processes. Because of the transparent trading that is happening with the ECN brokers, investors are able to fully participate in the trades. ECN brokers display the important data using a drop down list. In the drop down menu, the best ask prices and bids are placed on top, then the next 4/5 bids and ask prices are shown below that. Moreover, ECN brokers provide their investors with the corresponding contract or volume size along with the bids and ask prices.

As ECN brokers are not actually market makers, it means then that they do not gain profits from the spreads. With that, ECN brokers ask a little amount from the investors. This little amount is called as the trading fee or the commission. This amount is charged to every transaction that is made by the traders. In that manner, ECN brokers earn a little of something out from the transactions that are being executed. It also follows that the ECN brokers’ interests revolve around the success of the traders. If traders earn more profits from the trades that are made through the ECN brokers, it means that more trades will be performed in the future. As such, more trades mean more transaction. And again, each transaction is charged. Although ECN brokers do not earn anything from the spreads, they still earn out from the large volume of traders that join in their market.

Some analysts say that STP brokers are just like ECN brokers. Although they may share the same characteristics, ECN brokers shine more because of their ability to display the real depth of the market. This is one thing that STP brokers don’t have. Another thing is that unlike ECN brokers, STP brokers provide fixed spreads to their clients.

With ECN brokers, no dealing desks are utilized. This means that the trades are being executed at a faster rate and that the traders remain anonymous. Due to the fact that there is transparency and anonymity, more competitive offers are expected on the bids and ask prices; as a result, lower spreads are created for the traders.

Advantages when trading with ECN brokers

1. ECN brokers provide a fully transparent foreign exchange market for their investors (bids and ask prices of other traders are shown)
2. There are no fixed spreads (although, there are some investors who see this is a disadvantage).
3. ECN brokers make sure that their clients do not lose. Their clients’ success will always be prioritized in order to have a larger volume of traders in the future.
4. When you invest with ECN brokers, no intermediaries are involved in the process. It means that from the brokers themselves, the orders go directly to the liquidity providers.
5. ECN brokers ensure anonymity to their tradersThe orders will never be executed at a lower or worse price, rather, ECN brokers execute the orders at a higher price.

Disadvantages when trading with ECN brokers

1. ECN brokers charge a trading fee on every transaction.
2. When the liquidity is low, ECN brokers have higher spreads compared with brokers with fixed spreads.