ECN vs. STP Brokers: What’s The Difference

Today, the Forex market is undergoing a significant transformation with the development of electronic systems and technologies to automate trading processes. The development of the Forex industry gave rise to the creation of various electronic systems of transactions, which provide a smooth process of trading financial assets. The most common are ECN and STP systems, which often become the choice of most Forex brokers today. But what are ECN and STP brokers, and what is the distinction between them?

This article will shed light on the question of who ECN and STP FX brokerages are and what is the inequality between them. You will also learn what kind of brokers are best suited for Forex trading.

ECN, or Electronic Communications Network, is an electronic system of Forex brokerage trading and aims to reduce the number of third parties and intermediate links (intermediaries, exchanges, etc.) in the cooperation (trading activity) between the broker and traders, consequently providing them direct market access.

In the usual system, when working with a Forex broker, the latter selects the second party in the transaction based on available to him orders. In ECN trading, this process takes place automatically, and the most suitable side of the deal is selected from the entire database. In situations when the market is liquid and there is a “deep” order book, ECN Forex brokers have undeniable advantages, due to which the speed of order execution and trading conditions increase. The interest of the company providing this system is to receive a fee for a deal or for the time of use of such service.

The distinctive feature of such a system of transactions is that the second party can be not only market makers (dealing desk brokers), which usually act as the largest financial corporations, significantly increasing the volume of liquidity in the system, bringing it to specified parameters, but also other players, which means that the order placed by the trader with a certain volume and at a specified price, can be executed only partially. In this case, the system selects another offer closest in parameters; the actual price may differ from the initial one and become the weighted average price in case of large orders.

Electronic Communication Network systems allow uniting clients (traders and financial institutions) from entirely different parts of the world, which noticeably increases total turnover, allows trading around the clock, and increases liquidity, eventually positively affecting the speed of execution and spread. Such a system, where an order from each player (not just from market makers and liquidity providers) is put on the market, is very progressive because of the growing popularity of trading among private traders and increased transparency. Transparency refers to transaction volume and price, not the counterparty’s name. Formally, the counterparty to all transactions is an ECN broker (system), which, as a rule, also provides its participants with the accompanying analytical and information support and the necessary software in the form of trading platforms.

STP or Straight Through Processing is one of the varieties of Forex brokers’ work within the NDD (No Dealing Desk) infrastructure framework. STP – the system that allows the Forex broker to send the clients’ orders for execution directly to the liquidity providers – banks trading directly at the interbank market. The more liquidity providers there are, the better execution of clients’ orders. The fact that traders have access to the real Forex market and the possibility of instant execution of orders without the dealer’s participation makes this system extremely attractive to most traders.

On the other hand, STP infrastructure is a developed system with automated processing of bets starting from the moment of opening and receiving profit after closing. Forex brokers working on this system from the beginning to the end carry out automated processing of transactions and/or payment orders, including automatic creation, approval of instructions, clearing, and settlements. All orders are routed from the trader’s trading platform (e.g., MT4) automatically and directly to the liquidity suppliers without passing transactions through a dealing desk. Such a model allows traders not to worry about their investments, as the broker does not take any particular interest in the personal finances of its clients. 

Among all existing types of execution systems, which traders use to access the market, the STP system is the most innovative and technologically advanced solution used by most brokerage companies in Forex trading. STP technology is used primarily by serious traders who work with large sums. STP Forex brokers receive quotes from several liquidity providers and acts as a market. Having an STP account is an important advantage for a brokerage company. This technology allows opening orders at the best prices, increasing profits for the trader. Many experts consider finding the right STP broker the most essential first step to success in online trading.

Despite the fact that both systems of transactions ECN and STP in the Forex provide with straightforward access to the market and at first glance do not differ, at the same time, have a number of significant differences, which often become the basis for choice when it comes to start investing Forex activity. Below are the main differences between these two popular systems of making transactions in the international foreign exchange market. 

The first and most crucial difference between the electronic systems of making transactions is the way of routing orders within the trading process on the Forex market. In this case, all market orders received in the book of orders and requiring immediate execution are considered. Thus, brokers working in the ECN system send market orders directly to the central interbank market, where they are executed at the best market rate without interference from the dealers, which, as a rule, are professional market participants providing clients with access to the market and making deals with them as a counterparty on their own behalf and at their own expense.

Brokers working in the STP system imply an absolutely different approach to fulfilling traders’ market orders. In this case, orders are accumulated and sent directly to the counterparty, an interbank market, a global network used by financial institutions to exchange currencies between themselves, another STP broker, a market-maker, or even an ECN brokers.

The rapidity of execution of orders is the most essential indicator reflecting any Forex broker’s effectiveness. However, it largely depends on the electronic system of execution the broker selects. This index directly affects trading efficiency and has a direct correlation, expressed in the probability of slippage at order execution, for better or worse. 

So, ECN brokers carry out transactions according to the following principle: operations between system participants are executed at the fixing of the equilibrium price for the financial instrument. Requests of each trading participant get to the unified catalog of requests. Matching orders are executed only if the price level and the instrument name fully conform. Due to such a system, the processing of trade requests is automatic, without intermediate dealers’ participation, allowing a considerable increase in the speed of requests’ execution. Organizations, which need constant or periodic exchange of currencies, are connected to the interbank environment, where they send their applications. The system automatically connects counter requests without processing by any third party, allowing transactions to occur almost instantaneously. 

At an STP broker, the execution speed can vary depending on how the broker routes the trade, which can vary with each trade. Also, the speed of execution is affected by the type of infrastructure and equipment used by the liquidity providers to which STP brokers send client orders. The main disadvantage of this system is the absence of a two-level Depth of Market, which allows the trader to see only the best price without the possibility of analysis.

The concepts of slippage and requotes are inextricably linked to the forex market. The first term explains a situation when a market order placed at one price is executed at another. At the same time, requote indicates a situation when it is impossible to place a new order or close an existing transaction due to high market volatility.

Brokerage companies working within the ECN system provide such trading conditions at the market when the market orders are executed directly from the interbank market, so the probability of repeated quotations or slippage is minimized, as compared to STP brokers, which mostly rely on other brokers for the market orders execution.

Traders can make a considerable number of trades as part of their trading activity, so the issue of commissions is very important in this case. The worst thing that can happen with high volumes of transactions is a high commission. The commission policy of ECN brokers includes a fee charged on every trade made in the market, but does not include the spread. Such a commission ladder is a comfortable instrument for earning such brokers, as they usually deal with high volumes of trades. STP brokers, in turn, use another system of earning which includes a commission for each trade executed in the market, as well as spread commission which may vary considerably depending on the market situation with each trading instrument taken separately.

Spread is the key indicator of the trading process, reflecting the difference between the best buy prices and the best sell prices of an asset. Therefore, there is a law in the market that states that the narrower the spread, the more liquid a trade asset is. 

Because of technological aspects of infrastructure and software of ECN systems, the brokers working on this model, in contrast to the STP brokers, have the narrowest spreads in any market and financial instruments, sometimes reaching zero with only one commission because they reflect interbank market conditions.

Many traders, starting their way in Forex trading, ask many questions regarding what trading strategy to choose, how to conduct transactions, and so on. However, the first and the most crucial question is devoted to the choice of a broker, both its type and brand. If the brand does not affect the specifics of a trader’s trading, the type of transaction system has a direct impact. So which broker type is better for Forex trading, ECN or STP?

In order to determine the choice of the broker, it is necessary to understand the fundamental differences, which lie in the specifics of both types of electronic systems of transactions in the market.

Thus, ECN brokers usually charge a commission from each trade, while STP brokers take a commission from trades, and so does the spread. Many ECN brokers send transactions to the dealing desk of a market maker, and this technology is called Straight Through Processing or STP. The more market makers working with an ECN broker, the better for his clients because this increases the range of spreads. 

ECN brokers typically pay a rebate to market makers depending on the flow of orders, so the more clients the broker has, the lower the commission or spread. In other cases, ECN brokers may first “match” the buyer with the seller and only then conduct the order through banks or other liquidity providers. The liquidity providers’ pool of the ECN broker is frequently unknown to clients, so it is impossible to know where exactly their market orders are sent. This type of broker is perfect for traders who prefer scalping strategies due to the high speed of order execution.

STP brokers are attractive because they allow trading with micro lots, while ECN brokers usually have only standard lots, although it is not always the case nowadays. STP can have fixed and floating spreads, which is also traditionally considered when choosing a broker by professional traders. Fixed spreads are generally higher than floating spreads, but they are stable. With floating spreads, STPs may take the ask price from one source and the bid price from another (plus, of course, a markup). In practice, an STP broker may operate on the same program as the trading platform (for example, MT4) and with the same liquidity providers as a regular ECN. STP brokers often charge additional service fees, but many ECN brokers do so.

Today, with the rapid development of the Forex industry and all its elements, the effectiveness of trading directly depends on the right choice of every component, from trading strategy to a brokerage company. When choosing whether ECN or STP brokers to cooperate with, foremost, you should pay attention to the rapidity of order execution, commissions, and spreads, which will directly affect the profitability of trading.