There are two types of brokers in forex trading: Straight-Through Processing (STP) and Electronic Communication Network (ECN) brokers. Each one has distinct features and benefits.
This article will cover what are STP and ECN brokers and the difference between them.
STP (Straight-Through Processing) brokers are intermediaries that execute client orders without any dealing desk intervention. These brokers pass the trades from their clients on to a liquidity provider, which could be another broker, a bank, or a financial institution.
STP brokers earn their income through spreads and may also charge trading commissions.
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ECN (Electronic Communication Network) brokers provide a platform where participants (banks, market makers, individual traders) interact directly. Through an ECN, traders can access the global currency markets and trade directly with other market participants.
ECN brokers typically charge a small commission for each trade and offer small spreads.
Here are the key benefits between ECN and STP brokers.
ECN Brokers: Orders are sent directly to the central interbank market for execution at the best market rate without interference from dealers. The execution speed is also rapid. ECN brokers provide transparency and minimise the potential for slippage at order execution.
STP Brokers: Orders are accumulated and sent directly to the counterparty, which could be another STP broker, a market-maker, or even an ECN broker. Execution speed and efficiency may vary, potentially leading to slippage at order execution.
ECN Brokers: ECN brokers typically charge commissions for trades and offer very small spreads. They also offer access to large liquidity provider institutions ensuring faster transaction times and efficiency.
STP Brokers: STP brokers earn via spreads and may also charge trading commissions. They generally do not have access to ample liquidity pools, potentially leading to slippage and slower order processing.
ECN Brokers: They are suited for high-frequency and day traders due to faster execution and lower spreads.
STP Brokers: They are suitable for daily traders seeking relatively low costs and quick execution. They usually use common trading platforms such as MetaTrader, which is easier to use.
Overall, traders with limited trading budgets and seeking lower transaction volumes might find STP brokers suitable due to lower fees and relatively tight spreads. Those with massive transactional requirements and high volumes might benefit from partnering with ECN brokers, which offer the narrowest spreads possible on the market.
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