Yesterday I talked about Market Making brokers today I�ll discuss STP and ECN brokers.
Forex Broker, which is not a Market Maker, is either a Straight Through Processing Broker (STP) or an Electronic Communications Network Broker (ECN). These types of brokers are typically (and sometimes erroneously) called Non Dealing Desk brokers.
ECN Brokers:
ECN Broker is a broker per-se, one who gives you a direct access to display your order in the market. This broker�s income comes from a certain mark-up on the spread displayed to you: for instance if the current actual spread on a EURUSD pair is 0.2 pips, this broker might display you a 0.5 pips spread making 0.3 pips on every trade you make.
There are several ECN brokers out there with Swiss Dukascopy being one of the most recognized with the ECN execution model.
For a retail trader ECN execution is often beyond reach: due to its inter-banking nature, traders are typically required to trade very large lots and minimum deposit requirements are somewhere from $50,000 to $100,000. FXOpen recently tried to cover this gap by offering a MT4 ECN platform, not very successfully or transparently in my opinion.
STP Brokers:
STP Broker is a type of a Market Making broker. This broker, most of the time, displays its own quotes (which are correlated to the actual inter-banking quotes).
Now here is the real complexity: sometimes this broker routes your orders to the market (acts as an STP broker) but sometimes it doesn�t (acts as a Market Maker).
For instance, successful traders or successful trading algorithms will be automatically routed to the market while small or losing clients will not. This way the broker profits twice: once by clients� losses and another by not losing money to successful traders (of course this never works 100% but it does most of the time).
This way the STP broker�s commission comes from two sources: unsuccessful clients� losses and commission arbitrage on routed orders � when you trade at 2 pips with this broker for example, it routes your orders to another broker or the inter-banking market thus making 1 pip without assuming any risk.
This model is also responsible for all the re-quotes and order rejections. When you open a large order the broker routes it to the market, but the prices there might have already changed (the market does move very fast sometimes) � so the broker is faced with two options: either rejecting the order asking for you to adjust prices or completing the order by taking the risk that it might end up a successful trade meaning the broker will have to pay you from its pockets (Nostro).
So how do you as a trader distinguish between a MM, STP or ECN broker?
Well, it�s easy to recognize an ECN broker: the minimal capital requirements and the ability to see not only the bid and ask prices but also the amounts on either side of the price (Depth Levels) is the most notable ECN feature.
Can you tell the difference between MM and STP? Probably not.
It�s very hard to distinguish between these two and most of the time the brokers use a hybrid model anyway. As I mentioned in the first part: most of US and UK regulated brokers will not �trade against you� in the way that will make you lose money, not because they are moral but because this might cause problems with their license.
So to sum this up:
Market Maker � is the market, profits from losses and spread, typically never re-quotes
STP � sometimes is the market, profits either from losses or spread or both, re-quotes
ECN � route to the actual market, requires big accounts, plenty of re-quotes
I asked a Market Maker if they were “ok” on me Scalping them on a very fast time frame… up to 500 trades a day, they said it was totally fine, and I am getting quite a few re-quotes, would this be indicative of them being a market maker and using STP? And then again in another market maker brokerage I was told to piss off with my trading basically, would this be indicative of them hedging me and losing because I am not a losing trader?
Thank you for clearing this up by the way… so many other people explaining this give conflicting data, this is the way I thought the markets operated but didn’t know for sure.
it’s a very intricate question and therefore it’s hard to answer this without knowing who the brokers are.
it’s almost impossible to know whether a market maker STPs your trades or not.
no market maker likes profitable traders, simple as that.
I searched a lot but did not find anything useful about ThinkForex. He says that he´s an ECN also offering free vps. Do you have any knowledge or experience with them?
Thank you
never heard of them, but i doubt they are an mt4 ecn, there are only two companies who offer that and i doubt these newcomers invested couple of mils to get this technology.
you´re NOT right… because I´m on to develop my own IT Business introducing clients to Forex Trading I need urgently a good broker. Before I knew something about TF I had Alpari in my mind but if somone here who has experience with TF is very warm welcome because of their offer. So I only need a good broker beside Alpari and Co, nothin more and nothin less
One of my favorite trading “set-ups” is when prices have been in a trading range–between
key support and resistance levels–for an extended period of time (the longer, the better).
Has there been a price “breakout” from a trading range?
Hey, Thanks for this helpful explanation on the types of brokers. But have you any recommendation of a type of broker for a retail trader ? Is a STP broker correct ? I believe definitely not a Market Maker. Thanks for your help
Hi … Are you still searching for a good broker to become introducing broker ? If you are, please contact me back, I have a good one for you. Im their IB too and they are just perfect !!
I have a brokerage opening Pellucid FX (launch mid december)
I would like to have someone test my feeds with a fast scalping EA… ANYONE!?
It is a proper STP. When you make money it is yours…
But I need to fund out my liquidity provider is conducive to these types of robots. PM me, you can open an account or I can test the robot in the account myself if you like.
