Trading with STP Forex Brokers
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STP (Straight Through Processing) is a Forex brokerage model that involves sending client orders directly to the market without passing them through a dealing desk. An STP broker is similar to an ECN broker, where all client positions are passed directly to the market through interbank exchange houses or liquidity providers such as banks. STP Forex brokers promise to offer a highly transparent trading environment that is devoid of any conflict of interest with its clients.
However, STP accounts should not be considered as a real alternative to ECN accounts. ECN accounts are purely a non-dealing desk model that enables traders to trade the markets in real time by sending orders directly to the market. STP accounts are considered to be more of a hybrid of the ECN and market maker (dealing desk) models. Nevertheless, STP Forex trading accounts are proving to be more attractive than traditional dealing desk accounts due to the variety of advantages that traders enjoy, but STP also has a few drawbacks than the more advanced ECN accounts.
How Are STP Forex Brokers Different From Market Makers?
Market maker brokers are dealing desk companies that absorb client orders and either pass them internally to other clients or take the opposite end of the trade. Market makers or dealing desk brokers do not connect traders to a global liquidity pool or the interbank exchange. Therefore, all orders are distributed between clients, and the broker has the option to either fill orders from their clients or reject them completely according to the market’s liquidity.
Due to the 24 hours nature of the FX market, brokers experience variable liquidity and inconsistent volumes throughout the day. It is close to impossible for the broker to find buyers and sellers for the same volume every time; therefore, most brokers resort to taking the opposite side of their trader’s position. Since the FX market has a tendency to create more winners than losers, brokers usually succeed in profiting from their client’s losses. Apart from the spreads, clients’ losses act as the primary source of revenue for dealing desk brokers.
Since market makers profit from their client’s losses, all dealing desk brokers have a conflict of interest with their customers. Lots of broker scams and dishonest broker practices arise out of the broker’s greed to make money from their clients. Most market makers resort to tactics such as price manipulation, disconnecting the price feeds, increasing the spreads, filling orders at unfavorable price levels, and even resorting to changing client orders without their consent. Therefore, a majority of traders tend to lose money with market makers.
STP Forex brokers are more straightforward in their offerings, as they usually don’t have a conflict of interest with their clients. All client orders are passed directly to the liquidity provider, and the markets generally absorb the order without any intervention from the broker. STP brokers make money from the spreads charged for every trade, which is beneficial for both parties as far as fair and honest trading is concerned.
It is common to experience a significant number of re-quotes and large slippages from market maker brokers during times of low liquidity in the markets. Sometimes, dealing desk brokers will take a lot of time to fill orders, which can range from several seconds to minutes. Traders might also face platform down times, which can prevent them from opening or closing their positions under favorable circumstances. On the contrary, STP accounts do help in reducing the number of re-quotes as a trader is connected to a larger liquidity pool, and orders are filled relatively faster than conventional market maker accounts. One of the main advantages of STP brokers is the fact that orders are filled more quickly, and trade execution is seamless, which in turn helps traders to take advantage of market conditions without the broker interfering in any manner.
Does An STP Account Guarantee No Intervention From A Broker?
STP works through a bridge that connects a trader’s terminal directly to a liquidity provider or an interbank. STP bridges are also used by smaller brokers to connect their traders to large brokers, who will, in turn, choose to either connect the trader directly to the market or decide to absorb the trades internally. Therefore, STP is not a true ECN alternative, as ECN brokers have no role in filling up their clients’ orders. STP, on the other hand, allows brokers to tap into a larger liquidity pool that is provided either by the global exchange houses or by larger brokers. Therefore, STP Forex brokers are not completely free from conflicts of interests, but STP accounts do provide a greater sense of security than traditional market maker brokers.
How Does STP Compare To ECN?
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STP and ECN have several similar characteristics, but some traders prefer STP in its pure form due to the lack of a commission per trade that is usually associated with ECN accounts. Most institutional traders open ECN accounts to enjoy tighter spreads at the cost of a commission per trade that is charged as a percentage of the traded lots. Scalpers are also known to trade with ECN conditions to get in and out of the markets as quickly as possible and enjoy tighter spreads for better market execution. However, some retail traders are more comfortable with the higher STP spreads rather than accounting for the commission for each trade. Therefore, if a commission-free trade is your priority, STP accounts can provide more advantages than ECN accounts.
When it comes to the speed of trade execution, ECN has the upper hand over regular STP accounts as traders are exposed to the actual liquidity available in the market. STP accounts may be bridged to larger brokers or exchange houses, which can result in slower trade execution times and a few re-quotes. ECN accounts have minimal instances of re-quotes, and it is guaranteed that a trader’s position will be filled at the strike price, even if it is a partial fulfillment of the order.
How Do I Make The Choice Between ECN & STP Forex Brokers?
If you are finding it difficult to make the choice between ECN and STP, you should trade on a demo account to get familiar with both platforms and decide on a system that suits your trading style. Some traders might find ECN to be more expensive from a commission point of view, but they may be surprised to find that ECN accounts may prove to be more economical in the long run. ECN accounts also provide the best trading conditions; however, STP accounts are not far behind regarding the speed of trading and the overall trading environment. Regardless of your choice, always choose a Forex broker that is regulated by a reputable regulatory agency, and ensure that the broker of your choice has a good reputation in the market.