When engaging in trading, selecting a broker that aligns with your specific requirements is important. In Forex, the prevailing types of brokers often utilized are Straight Through Processing (STP) and Electronic Communications Networks (ECN). Each type possesses its distinct set of benefits and drawbacks, which can pose challenges for traders when attempting to determine the most suitable option for their needs.
Forex Brokers Offer Two Execution Models
Forex brokers offer two execution models, that determine how orders are activated in the market.
DD Brokers
A dealing desk broker, also known as a “market maker,” processes orders through a dedicated “dealing desk” managed by the broker. DD brokers can accept or reject orders based on market volatility and news reports. If a customer’s position cannot be matched with another customer, the DD broker may take the opposite trade.
NDD Brokers
Conversely, a non-dealing desk broker directly sends orders to the interbank market.
NDD brokers use STP (Straight-Through Processing) or ECN (Electronic Communication Network) technology to forward customer orders to other liquidity providers. This grants traders faster and more competitively priced order fulfillment by granting direct access to interbank markets. DD brokers primarily earn profits from the spread they charge for trading and take the opposite side of a trade. They aim to profit when their clients incur losses.
Definitions
In order to distinguish between brokers, it is crucial to thoroughly comprehend each type’s distinctive features and benefits.
ECN
ECN brokers connect buyers and sellers in the financial market using electronic networks, eliminating the need for intermediaries. This allows for direct trade execution and maintains the traders’ anonymity. The ECN model offers extended trading hours, lower spreads, faster order execution, improved liquidity, and increased transparency in investor prices. Additionally, financial institutions can save on manual processing costs. ECN brokers are a great choice for individuals who cannot trade during regular market hours.
STP
Straight-through processing (STP) is widespread in the financial industry and among large corporations. It aims to streamline financial transactions by eliminating the need for manual intervention. Originally developed in the early 1990s for equity trading markets, the STP system greatly saves time and reduces human errors by automating the entire trading cycle.
Operating in real-time, the system allows traders to send orders directly to different liquidity providers in the interbank markets. This results in better prices for traders and the avoidance of requotes and order execution delays. STP has numerous benefits, including faster processing times, reduced settlement risks, and lowered operational costs.
Comparing Brokerage Models
When it comes to brokerage models, understanding the differences is key. Let’s break it down:
- Order Routing: ECN brokers ensure your orders go directly to the interbank market. On the other hand, STP brokers route your orders to various counterparts. While the route may differ, no dealing desk is involved.
- Structure: ECN brokers earn a modest fee for executing trades, while STP brokers can profit from commission fees and bid-ask spreads. STP brokers also offer the choice between variable or fixed spreads.
- Speed: If speed is your priority, ECN brokers guarantee the fastest trade execution thanks to their direct connection to liquidity providers. STP brokers might experience a slight delay when routing orders through intermediaries.
Although ECN brokers come with commission costs, they offer low spreads and lightning-fast execution, leading to lower costs in the long run.
STP accounts, in contrast, provide both fast trading speed and a favorable trading environment. Ultimately, the decision depends on your specific needs and trading preferences.
Bottom Line
When choosing between STP and ECN brokers, it is important to carefully consider which model aligns best with your trading needs. STP brokers allow access to third-party liquidity providers without the broker’s intervention, while ECN brokers facilitate direct execution through their networks, offering lower costs and improved liquidity.
Regardless of the broker type you opt for, verifying their regulatory status and reviewing customer feedback before committing is crucial. By doing so, you can find a reliable and trustworthy broker with whom you can confidently begin your trading journey.
