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The Difference Between an STP and an ECN Forex Broker Explained

September 23, 2020 13:00 UTC
Reading time: 7 minutes

This article will explain the differences between an STP and an ECN Forex broker and the Hybrid model (a combination of both ECN and STP). It will help traders to understand the different types of brokers available by comparing differences such as how they process orders, the lot sizes they allow, whether they require dealing desks or not and more!

The Difference Between an STP and an ECN Forex Broker Explained

Unfortunately, many people wrongfully associate Forex (FX) trading with scams. The problem lies in the increasing number of unscrupulous companies marketing false information to traders. The number of Forex-related scams has significantly increased over the past few years, so it is important for you to be able to identify a hoax. After all, Forex trading should be a potentially profitable experience.

When choosing a broker, always check if they are regulated by a relevant authority first. Simply put, if a broker is not regulated, your money is not safe. Every broker should abide by the rules of a financial authority. For the purpose of defending people from fraud, many countries have established private or state organisations that regulate the Forex market amongst other things. Generally speaking, these organisations are actively supported by the government.

The three countries with the most rigorous regulators are:

  • Japan - FSA (Financial Services Agency)
  • The UK - FCA (Financial Conduct Authority)
  • The USA - CFTC and NFA (Commodity Futures Trading Commission and National Futures Association

Choosing a broker is the very first step you need to take to be able to enjoy your trading experience. But many people do not know the differences that exist between fully regulated brokers, such as the difference between ECN and STP Forex brokers.

Types of Brokers

We can distinguish between several types of Forex brokers according to a range of criteria. Usually Forex brokers can be divided into groups for:

  • Brokers with licences (reputable)
  • Brokers without licences (non-reputable)

Depending on the trading platforms we can have:

  • MT4 Forex brokers
  • MT5 Forex brokers
  • Brokers with a proprietary platform
  • MT4 & MT5 Forex brokers

Depending on the execution of orders, there are:

  • Dealing Desk (DD) Forex brokers
  • No Dealing Desk (NDD) Forex brokers
  • Hybrids

NDD brokers include:

  • Straight Through Processing (STP) Forex broker
  • Electronic Communication Network (ECN) Forex Broker
  • Hybrid (ECN+STP).

Dealing Desk

We usually refer to DD brokers as market makers. The infamous term "market makers" is used because these brokers usually take the opposite side of traders' trades. They make money through spreads and by providing liquidity. They also try to find a matching long or short order from their other clients, before taking a countertrade or passing it on to a liquidity provider. They are known to offer artificial quotes and orders are filled on a discretionary basis.

No Dealing Desk

Contrary to DD brokers, NDD brokers use technologies without a dealing desk and route trade orders directly to liquidity providers. This allows clients to access real markets with better and faster fills. It is a bridge between clients and liquidity providers, and there are no re-quotes when an order needs to be filled. We differentiate between two types of NDD Forex brokers - the STP and the ECN.

STP Forex Broker

The STP (Straight Through Processing) technology requires no dealing desk and is the model which is used by Admiral Markets. All orders are routed to the broker's liquidity providers, and prices are executed at the bid/ask rate provided by liquidity providers. Liquidity providers in this case are hedge funds, big banks, and investors that effectively act as counterparties to each trade. Usually, the STP broker has an internal liquidity pool that is represented by different liquidity providers, that compete for the best bid/ask spreads for STP broker orders.

In a broader sense, STP means that the broker company plays the role of a silent connection provider between the market and the trader, rather than a dealing desk re-processing trades. The other benefit of an STP broker includes the 'DMA'. DMA stands for Direct Market Access. DMA refers to when a broker is passing their client orders directly to their liquidity pool, so orders are filled at the best possible price, with only a small mark-up spread by the broker.

You should always aim for the broker with the most variable spreads. The reason for this is that the broker with the most variable spreads is able to select the best bid from one of the liquidity providers from their own pool, and the best ask spread from another liquidity provider. That effectively offers the best possible spread for their clients. The STP execution simply goes without any requotes, and due to its lightning speed, it is very suitable for traders who like to scalp and trade the news.

So, what is an ECN Forex broker?

ECN Forex Broker

There are a lot of similarities between an STP and an ECN Forex broker, but the main real difference is routing. As mentioned above, the STP can choose to deal with different liquidity providers out of their liquidity pool, while the ECN acts as a kind of hub. The hub acts effectively as the major liquidity source, as it is represented by banks, hedge funds, and all the major market players.

They all become interconnected in order to find counterparties for the orders they are unable to handle internally. Another difference between the STP and the ECN is that ECN trading is mostly capped at a 0.1 minimum lot size. This is because there are very few liquidity providers allowing for less than 0.1 lots, which proves to be difficult for inexperienced traders who need to trade with smaller amounts of money (for instance, between 1000-2000 EUR). Therefore, a hybrid model was developed as a solution.

Hybrid Model

The Hybrid model is a combination of both the ECN and the STP. Usually, with this type of service, brokers are able to focus on providing great customer service, education, and different market analyses. Blending the ECN and STP models allows for a fully electronic Forex dealing service. This popular mix allows a Forex broker to fully automate the order entry, dealing with spread pricing and the trade execution aspects of their deal execution business.

Final Thoughts

Possibly the best model out of the three NDD options is the STP, which is the model used by Admiral Markets. However, the hybrid model is also an excellent option for Forex traders. With both the STP and the ECN models, brokers avoid market making. It is a win-win situation for traders and brokers alike. Brokers do not want traders to lose, because they will earn more from spreads or commissions the longer that traders are using their service to trade.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.