Trade Without the Need for a Dealing Desk with an STP Forex Broker
Some of you reading this will be wondering what an STP broker is. STP stands for Straight Through Processing, and this means STP Forex brokers customer orders are sent direct to liquidity providers, such as banks or larger brokers, without the need for running them through a dealing desk. There are a number of activities that come with this type of platform, including no unnecessary order delays, and no requotes.
Another big advantage of using STP Forex brokers is that an STP broker only makes money by adding a small commission, or marking up the spread. Unlike standard brokers who stand to make a profit from their client’s losses, an STP broker gets the same mark, regardless of whether the client wins or loses. This also means there is no conflict of interest, which is only going to be a positive thing. STP Forex brokers benefit more when their clients win their trades as they can charge a higher fee.
The advantages of using STP Forex brokers are as follows:
- Orders are processed quickly
- The currency prices offered are correct
- Automatic execution of orders
- Quotes can be avoided on STP platforms
- STP broker clients are never allowed to lose their trades
- Compared to other types of broker the risks involved are less
- Live market trends are provided to clients
What can an STP Forex broker offer?
There are a number of things that make an STP Forex broker different from other types of broker.
- STP Forex brokers don’t trade against their clients.
- There is no dealing desk and therefore no dealer intervention. Orders are sent to a certain number of liquidity providers, such as banks and other brokers.
- An STP broker can provide real-time market quotes.
- A bigger number of liquidity providers, which is good for the client as there are likely to be better fills.
If you are new to the world of Forex trading it will be pertinent to have an understanding of how the platform works. So let’s look at what happens to an order when placed with an STP broker.
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How STP Forex brokers work
The Forex market is one of the biggest markets for today’s modern investor. Daily turnover is in excess of $5.3 trillion, and the market is open 24/7. Understanding STP and how it works is vital for new traders, and a great way to explain it is by looking at the mechanism behind placing orders and seeing how they are executed on the charts. We’ll also look at all the parties involved in the whole arrangement.
Every broker has a front and back-end. At the front end is the platform, order buttons, charts, a trader’s account, open orders, and a few more besides. Behind the scenes is the back-end operation. Nowadays, platforms are very technologically advanced and data transferred from the back-end to the front-end is almost instantaneous. The processes occur in milli, micro and even nanoseconds.
There are a number of parties involved in processing, placing, and executing transactions. There is obviously a buyer and seller. But there is also a broker who brings the buyer and seller together. And there is also a liquidity provider, often a big name bank, who provides pricing. There is no physical market location like the stock market, and no physical record of trade transactions and executions. It’s electronic all the way when you trade in the Forex market. An STP broker locates and matches orders to a counterparty that is prepared to pay an agreed price. The counterparty could be another trader, a liquidity provider, or a market maker broker.
An STP broker is a really a type of Market Making broker
Most of the time an STP broker displays its own quotes, which are linked comparatively to real inter-banking quotes. There are two different routes an STP broker can take. They can route orders to the market, and act as a true STP broker. Alternatively, they can decide not to take this route, which is something they often choose to do with small or losing clients. In this way the broker has the opportunity to profit twice from the transaction. By not losing money to successful traders, and by clients’ losses. Most of the time this works very successfully for STP Forex brokers, but not 100% of the time.
As well as making two lots of profits the STP model is also responsible for large numbers of requotes and rejection of orders. When you open a large order the broker may decide to route the order through the market. However, it’s possible the prices have already changed. In which case the broker then has two options. To reject the order and ask for the client to adjust prices, or take a risk and complete the order.
How to tell the difference between a Market Maker, ECN, and STP broker
An ECN broker is easily recognizable. There will be minimal capital requirements, both the bid and ask prices will be clearly visible, along with the amounts on either side of the price. Which is known as the depth levels.
Telling the difference between a Market Maker and an STP broker is not quite as easy, and most of the time brokers tend to use a combination of both models. What some traders may find a concern is that MM and STP brokers stand to make a profit from their losses, which is always going to be a little unsettling and worrying. However, we feel it only fair to point out that using a US or UK regulated broker will remove this worry. A broker who is regulated in the UK or US will not trade against you. At least not in a way that will make you lose money. And this isn’t because they prefer to take the moral high ground. But because they would have problems with their license if they operated in such a way.