Choosing an STP/ECN Broker vs. Market Maker Broker
Often we get the question, “How do I know which broker is the best to trade with”?
There’s a ton of information on the internet that would guide you on how to choose a forex broker. However, many beginner traders get confused about which type of forex broker is suitable for them.
So, in this guide, we are going to break down different types of forex brokers and tell you which one you should opt for.
What are forex brokers?
Unlike equity markets, which are traded on global exchanges such as the New York Stock Exchange or the London Stock Exchange, forex transactions occur over-the-counter (OTC) between traders from all over the world. Because this network of market participants is decentralized, the exchange rate of any currency pair at any given time can differ from one broker to the next.
The main market participants are the world’s largest banks, who form an elite club in which most trading activities take place. They are known as the interbank market. Because they lack credit connections with these large players, retail traders are unable to access the interbank market. This does not disqualify retail traders from trading forex; they can do so primarily through two types of brokers: market makers and STP (Straight Through Processing) or ECN brokers (Electronic Communication Network).
Now that you have familiarized yourself with forex brokers, let’s discuss their types in detail.
Types of forex brokers
1. Market Maker broker
Forex brokers who use a Dealing Desk (DD) make money by charging spreads and providing liquidity to their clients. They are known as Market Makers.
Market Makers brokers make a market for their clients, which means they frequently take the opposite side of a client’s trade. They buy and sell currency in the OTC market at an openly quoted price. By doing so, a market maker acts as a counterparty to the majority of retail trades. Simply put, whenever a retail trader purchases a currency, the market maker sells, and vice versa.
Because market makers control the prices at which orders are filled, setting fixed spreads poses very little risk to them.
Furthermore, customers of Market Makers brokers do not have access to the real interbank market rates. But don’t be alarmed. The competition among brokers is so fierce that the rates offered by Market Makers brokers are nearly identical, if not similar, to interbank rates.
To help you understand better, here’s an example:
Let’s say you took a buy position for GBP/USD for 1000 units with your Market Maker broker.
To fill the order, your broker will first try to find a similar sell order from one of its other clients, or it will pass your trades on to its liquidity provider, which is a large entity that buys and sells financial assets regularly.
They reduce risk by earning from the spread without taking the opposite side of your trade. If no matching orders are found, they will be forced to take the opposite side of your trade.
A keynote to add here is that different forex brokers have different risk management policies, so check with your broker for more information.
- Some Market Makers have user-friendly trading platforms.
- Currency price movements can be less volatile than currency prices quoted on STPs or ECNs, which can be a disadvantage for scalpers.
- Market makers may have a clear conflict of interest in order execution because they may trade against you, and they may display lower bid/ask prices than another market maker or ECN.
- Many market makers disapprove of scalping and have a tendency to place scalpers on manual execution. This means their orders may not be filled at the prices they desire.
2. STP forex broker
Forex brokers with an STP system route their clients’ orders directly to liquidity providers with interbank market access.
They are classified as No Dealing Desk brokers. Orders placed by NDD brokers are not transferred through a Dealing Desk, which means that they do not take the opposite side of their clients’ transactions; instead, they simply connect two parties.
NDD STP brokers typically have a large number of liquidity providers, each of which quotes its own bid and ask price.
To make things clear, here’s an example.
Imagine if you decide to buy 1000 units of GBP/USD at 1.3850. Your order is delivered through your broker and then transferred to either liquidity provider A or B.
If your order is accepted, liquidity provider A or B will short 1000 units of GBP/USD at 1.3851, and you will long 1000 units of GBP/USD at 1.3852. Your broker will earn one pip in commission.
Because of the changing bid/ask quote, most STP brokers have variable spreads. If their liquidity providers’ spreads widen, they have no choice but to expand their own.
While some STP brokers have fixed spreads, the majority have variable spreads.
- Currency rates are accurate
- Orders are instantly executed
- Quotes can be avoided on STP platforms
- The risks involved are smaller than with other types of brokers
- You can get live market movements
- Currency fluctuations can be volatile
- They are not suitable for small traders because the minimum trading volume exceeds the capabilities of traders with limited capital
3. ECN broker
ECN forex brokers enable their clients’ orders to interact with the orders of other ECN participants.
Banks, retail traders, large financial institutions, and even other brokers could take part. In essence, participants compete by offering their best bid and ask prices. ECNs also allow their clients to view the Market Depth. Depth of Market shows where other market participants’ buy and sell orders are.
ECNs, like market makers, are divided into two types: retail and institutional. Many institutional market makers, such as banks, use institutional ECNs to transfer the best bid/ask to other banks and financial institutions, such as hedge funds. Retail ECNs, on the other hand, provide retail traders with quotes from a few banks and other traders on the ECN.
Unlike fixed spreads offered by some market makers, currency pair spreads vary on ECNs based on the pair’s trading activities. There may be no ECN spread at all during very active trading periods, especially in highly liquid currency pairs such as forex majors (EUR/USD, USD/JPY, GBP/USD, and USD/CHF) and some currency crosses.
- Since the bid/ask prices are obtained from many sources, you will normally get higher bid/ask prices.
- At times, it is possible to exchange on prices of very little to no spread.
- Their exchange sites are usually less user-friendly.
- Because of variable ranges between the bid and ask values, it can be more difficult to gauge stop-loss and breakeven points in pips in advance.
So, which forex broker to choose?
Each type of forex broker has its pros and cons, but the best choice for most forex traders is an STP broker.
STP is applied by the use of a bridge, which connects a trader’s platform to a liquidity provider or an interbank. Smaller brokers use STP bridges to link their traders to larger brokers, who may either connect the trader directly to the market or absorb the trades internally.
STP forex traders are often more open in their services, and they usually do not have a conflict of interest with their clients.
Both customer orders are routed directly to the liquidity provider, and the markets usually absorb the order without the intervention of a broker. STP brokers profit from the spreads paid on and contract, which helps both parties in terms of open and reasonable trading.
Many similarities exist between STP and ECN, but some traders prefer STP in its purest form because ECN accounts usually charge a fee per transaction. Higher STP spreads are more attractive to retail traders than paying for each trade’s fee. As a consequence, if you require commission-free trading, STP accounts can be superior to ECN accounts.
STP forex brokers FAQ
We know you’ll have some important questions popping in your head, so let’s try to answer that.
How do STP brokers work?
Understanding how the forex market operates is an essential part of a trader’s path. So, let’s see how we can clarify what goes behind the scenes of an STP forex broker.
Broker platforms have two parts: the front end and the back end. The trading site, charts, order keys, trader pages, and other features are all part of the front end. What occurs behind the scenes is referred to as the back end. Modern technology has progressed to the point where contact between the front and back ends is available instantly, requiring just a fraction of a second.
Aside from the apparent buyer and seller, there are many other players interested in forex dealing. It also includes a broker that serves as an intermediary between the buyer and seller, as well as a liquidity supplier, who is typically a big bank, which offers the rates. Unlike a stock exchange, there is no actual location where trading will take place and no physical documentation of the transfers and executions made by investors.
In forex trading, everything is done electronically. The STP forex broker finds and fits orders with a counterparty who is happy to pay an appropriate fee. Another broker, a market manager, or a liquidity supplier, may be the other party.
As previously mentioned, the first (and most important) advantage is that there is no conflict of interest. Scalpers will use the same tactic with all trades without being guilty of scalping. They remain anonymous and are not subject to any bans, exclusion, or requotes.
Better execution and market access are two of the most valued advantages by traders. They can compare various liquidity providers’ rates, and their trading is not limited to a single source of knowledge, as is the case with dealing desk brokers. STP brokers avoid requotes and setbacks, which can be highly frustrating.
How to choose the right STP forex broker
Since the forex market is so huge, the idea of having to scroll through all of the available brokers can be intimidating.
Choosing a forex broker to trade with can be a difficult task, mainly if you are unsure of what to look for.
Here are seven steps for choosing the right STP forex broker:
- A high level of security is the first and most significant feature of a good broker. After all, you wouldn’t give anyone thousands of dollars if they weren’t legitimate, would you?
- At times, you could need to make a trade-off between low transaction volume and a more reliable broker. Consider your options after determining whether you want tight spreads for your trading style. It all comes down to finding the correct balance between protection and transaction costs.
- The majority of forex trading takes place on the trading platform of the broker. This means that the trading platform offered by your broker must be both user-friendly and safe. When looking for a broker, it is important to understand what a broker’s trading platform has to offer.
- Look for an education section on the website, which includes webinars and tutorials on the fundamentals of forex markets, popular currency pairs, and market forces that trigger buying or selling pressure. These articles should go into depth on how central banks affect currency markets when they lift or lower interest rates, as well as how traders should prepare for these recurring events.
- Your broker is expected to fill your orders at the best possible price. Under typical market conditions, there is no excuse for your broker not to fill you close to the market price you see when you press the buy or sell button.
- Since brokers aren’t perfect, you should pick one with whom you can easily communicate if questions occur.
- Finally, good STP forex brokers can make it easy for you to deposit and withdraw funds.
So, there you have it. We are sure that now you won’t have any confusion about the types of forex brokers and which one is best for you. If you do have any questions, don’t hesitate to reach out to us. We’re more than happy to help!