Broker Execution Types STP

As you may know, there are a few different types of brokers in the retail foreign exchange market including Market Maker, ECN, STP and etc. The criteria we talked about here is the order execution type, basically, how a order will be executed after you placed one through your Electronic Trading Platform, Telephone or other methods. Each execution type has its own advantages as well as disadvantages comparing with other types. In this article, we are only focusing on STP brokers. Please check other articles if you would like to know the feature of other type brokers.

The STP stands for Straight Through Processing. Through STP is enabling all traders to conduct the entire trade process electronically. In other words, there is no need for manual intervention anymore because through electronic system provided by STP, all processes carried out in capital market and payment transactions are able to be carried out. Furthermore, this concept is already adapted by others financial planning sector like oil and gas and many more.

A STP broker is between Market Maker brokers and ECN brokers, this model can be called hybrid STP model (Dealing Desk + No-dealing Desk). Sometimes this broker routes your orders to the market (acts as an STP broker) but sometimes it doesn’t (acts as a Market Maker). Each STP broker signs a business contract with its liquidity providers or prime brokers, where the contract terms regulate the minimum transactions level which will be accepted by the liquidity provider. This means that all small orders (normally below 0.1 lot) placed by traders can not be sent to the providers, because they will not be accepted according to the agreement. Thus, these orders should be handled by the STP broker, who in this case becomes a counter-party for your transaction (i.e. Dealing Desk Model). You now may understand that with all the Mini or Micro account, you STP broker is most likely a counter-party of your trades like Market Maker. However, for all larger orders, the STP broker will use the real STP technology bridge to send orders to its liquidity providers. Do not forget, with each transaction, the broker receives a portion of its spread.

A STP broker may add a small spread on the top of the best bid/ask price from the market, and that’s what their profit comes from. Most of STP brokers offer a variable spread, but some of them do offer a fixed spread.

Let’s have a simple example about how a STP broker works. The broker has 4 different bid/ask prices from 4 different liquidity providers in the markets as the following table:

The system will sort these bid and ask prices from best to worst. In our case, the best bid quote is 1.6000 and the best ask price is 1.6001 (i.e. sell high and buy low). Thus, the best bid/ask quote in the market is 1.6000/1.6001. Do you think you will see this price in your trading platform? Of course not, as the broker has to make some profit from you trade. The broker normally adds a small fixed markup, let’s say 1pip. Then the quote you will receive is 1.5999/1.6002 and the spread will become 3 pips. Therefore, when you place an order to buy 1lot (100,000 units) at 1.6002, your order is sent through your broker and then routed to Liquidity Provider A or B.

When your order is acknowledged, Liquidity Provider A or B will have a short position of 1lot at 1.6001, and you will have a long position of 1lot at 1.6002. Your broker will earn 1 pip in profit. This changing bid/ask quote is also the reason why most STP type brokers have variable spreads. If the spreads of their liquidity providers widen, they have no choice but to widen their spreads too. While some STP brokers do offer fixed spreads, most have VARIABLE spreads.

Let have a briefly go through why a STP broker can either offer a fixed or a variable spread. A STP broker is an intermediary between clients and liquidity providers receive prices posted by the liquidity provider on the interbank market. Most providers offer fixed spreads and are Market Makers. Therefore, the STP broker can let spreads to be fixed. The STP broker can also leave the spread at 0 and let the system take the best bid and ask from the number of providers (the more the better) and in this way provide variable spreads.

In conclusion, STP brokers make money on spreads, thus even though they do not have a dealing desk to monitor and counter-trade client orders, they are still able to set their own price. STP brokers are also interested to see their clients trading profitable, so that a broker can continue earning on spreads.

Please find out all the Market Marker ECN brokers by clicking Here

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The Response to above acticle

2012-04-24 03:33:22
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