Some Forex brokers in the market (including ZFX) would offer two types of trading accounts: STP and ECN. Aside from the differences in spread and commission, the two account types also process client orders in different modes through different platforms. This article will introduce to you the differences between STP and ECN trading platforms.
STP and ECN Account Comparison
|STP account||ECN account|
|• Mostly floating spread||• Very low floating spread with a commission|
|• Only a bridge connecting traders with liquidity providers||• Link between traders, liquidity providers and other market participants|
|• Prices from liquidity providers||
|• Orders are automatically executed without re-quotation||• Orders are automatically executed without re-quotation|
|• display market depth Dom and liquidity information|
STP: Orders Directly Sent to Liquidity Providers (LPs)
STP refers to Straight Through Processing. An STP broker will send the orders directly to its liquidity providers (banks, market makers or other brokers) for processing when the client trades, without human intervention. Liquidity providers are generally able to conduct forex transactions at a higher level, directly connecting to the interbank market.
Generally speaking, behind the STP forex trading platform, the brokers will closely connect and cooperate with liquidity providers. Some STP platforms have only one liquidity provider, while others have several to increase their trading volumes.
The bid and offer price quoted by each liquidity supplier is not exactly the same, and the brokers can choose the best price from among them to be displayed on the trading platform. Clients of STP platforms will be able to see the real-time market price, and their orders will be passed to the market for execution immediately once placed. The more liquidity providers there are behind the broker, the more liquidity there is and the more smoothly the order will be filled.
Many brokers claim that they are truly ECN platforms, but the system behind them is only STP. Strictly speaking, only a handful of trading platforms meet the definition of ECN.
STP brokers make money from spread
In general, brokers who use the STP model act primarily as middlemen, sending orders from all their clients to liquidity providers.
Since the spreads of liquidity providers are generally low, brokers can add one or a half-point to this spread to make a profit. If the broker works with several liquidity providers, it can pick the best offer and bid prices to reduce the spread as far as possible, thus increasing the profit ratio.
Spreads on STP trading platforms are mostly floating, although brokers can also set fixed spreads, this is highly unlikely.
ECN: User Trade with Other Market Participants
ECN stands for Electronic Communications Network. Forex trading platforms operated in ECN mode allow individual traders to trade with other market participants, that is, a client’s order can be matched with orders of other clients in the market. In the ECN model, participants (banks, retail traders, hedge funds, brokers, etc.) send the best available bid and ask quotes to the ECN system, where the order is automatically matched. When the counterparty of a client’s trading position is found, the transaction will be executed immediately. Under the ECN model, brokers are acting as a form of hub where market participants can trade with each other.
Many people may confuse STP mode and ECN mode, mistaking the STP trading platform as an ECN trading platform. A true ECN broker would necessarily have a data window on its platform showing the depth of the market that allows clients to see the bid or ask orders and the size of other participants, so as to ensure transparency.
ECN brokers make money on commission
The spreads on ECN trading platforms are generally very low but are all floating. Brokers who use the ECN model will typically charge a fixed commission on trade entries. As ECN brokers feature spreads as low as zero pip, instead of widening the spread, brokers will usually charge a flat fee as their only source of income.
Neither ECN nor STP brokers trade with clients on the platform directly. As long as there are enough transactions, brokers can profit from a slight increase in spreads or charging a commission. The profit models of ECN and STP brokers are much the same, and the brokers want the traders to make profits too, so that they can continue to generate stable income in the long term through spread and client money.
STP Brokers may integrate the Dealing Desk model
Some brokers, however, may adopt the hybrid broker model of STP plus DD (Dealing Desk). This is because the liquidity providers behind the broker may specify the minimum transaction volume, and orders below which will not be sent to the liquidity providers. In such a case, the broker will act as the counterpart of the client. The broker would then manually combine the orders and pass them to the market for hedging.
Before hedging, however, brokers could categorize their clients. Only those with high profitability would be sent to the market for hedging, which will be processed by banks and other counterparties. For clients with a high loss rate, the broker will act as their counterparties, and the loss will become the broker’s profit.
All in all, the ECN model is arguably the most transparent in forex trading, with brokers making money only through commissions, not spreads, and not acting as counterparties to clients.
Related Article: DD and NDD Forex Brokers- What are the Differences?
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.
ZFX (Zeal Capital Market) is an online forex & CFD broker providing more than 100 products for forex trading, commodity trading, index trading, and share CFDs trading. The minimum deposit for the account opening is only USD 15. Open a trading account and download our MT4 trading platform now!