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Straight Through Processing (STP) Brokers


STP is a different brokerage model where the Broker sends orders directly to the market without passing them through a dealing desk. An STP Broker promises to offer a highly transparent trading environment without conflicts of interest with its clients. So far, it sounds like the ECN Type, right?


STP accounts can't be considered a perfect alternative to ECNs. ECN accounts are purely a non-dealing desk model that enables trading the markets in real time by sending orders directly to them. STP accounts, instead, are considered to be more of a hybrid of the ECN and Market Maker models (A broker with a dealing desk).


  • Operation: STP brokers route their clients' orders directly to liquidity providers in the interbank market without dealing desks. They connect traders to larger brokers or the market directly.

  • Liquidity: Offers direct access to market liquidity, which can result in better trade execution speeds and lower spreads.

  • Costs: They often charge smaller spreads than Market Makers and may charge a commission.


Straight Through Processing (STP) Trader Example


  • Profile: David is an intermediate trader who understands the forex market basics and is keen on better spreads and faster execution.

  • Trading Style: He trades more frequently, sometimes making several trades a day, focusing on both major and minor currency pairs.

  • Why STP Suits Him: An STP broker is suitable for David as it offers more competitive spreads than a typical MM broker and faster execution, which is crucial for his frequent trading. The direct processing of his trades to the liquidity providers ensures that there is no conflict of interest, which David values.

Electronic Communications Network (ECN) Brokers


An Electronic Communications Network or ECN broker does not have a dealing desk. Instead, it provides an electronic trading platform where professional market-makers at banks, traders and other market participants can enter bids and offers through their system.


  • Operation: ECN brokers provide a platform where traders and liquidity providers, like banks and financial institutions, can enter bids and offers. They facilitate direct trading between market participants.

  • Transparency: Offers high transparency as traders can access the actual market prices and see the market depth.

  • Costs: ECN brokers usually charge tighter spreads and a fixed commission for each transaction.



Electronic Communication Network (ECN) Trader Example


  • Profile: Sophia is a seasoned trader with a deep understanding of the financial markets. She demands transparency and control over her trades.

  • Trading Style: Sophia uses high-volume, sophisticated strategies, including scalping and day trading. She trades various instruments, including currencies, stocks, and derivatives.

  • Why ECN Suits Her: An ECN broker is the best fit for Sophia due to its high level of market transparency, access to market depth, and tight spreads. The ability to see the order book and trade directly with other market participants is crucial for her advanced trading strategies.


Direct Market Access (DMA) Brokers


DMA brokers are abundant, though it is hard to know where to start when choosing which one to trade with.


A DMA broker is an execution model that allows traders to place Buy and Sell orders directly onto order books. Hence, traders enjoy greater market visibility whilst interacting with market exchanges directly. In addition, a DMA system doesn't rely on aggregating orders (As the other Non-dealing desk alternatives) over the counter. Therefore, investors can choose their prices since it offers the best composite quotes obtained from the multiple forex quote providers that give the DMA broker its liquidity in the forex market. The main difference between ECN and DMA is that DMA brokers make individual contracts with each liquidity provider. In contrast, ECN brokers are connected to anonymous ECN networks with no direct agreements.


Typically, each provider will post their best markets to the DMA broker. The Broker then executes transactions, watches, and fills orders for their clients accordingly. The DMA forex broker generally charges a commission or widens the bid/offer spread to make a small profit on each trade executed. Sometimes, they profit from both alternatives.

Market Maker (MM) Broker


A Market Maker Broker is a notably different broker type. They typically offer their clients a two-sided market from a specialist forex trader operating as part of the Broker's internal dealing desk. As a result, a Market Maker will generally take the other side of any transaction passed from their client by buying on their bid side or selling on their offer side of the quoted price.


The market maker aims to capture a portion of the spread and do sufficient volume on both sides (bid and offer) to avoid laying off accumulated risk with another professional counterparty. Laying off this risk costs the broker money; the counterparty is usually a big bank (or a bigger one). Furthermore, if the executed trade is large enough, the market maker will immediately offset the transaction, especially if they think the market might move against it. Alternatively, they can add it to their trading book, depending on their market outlook and the transaction size.


  • Operation: Market Makers create a market for their clients, meaning they often take the other side of a client's trade. They set the bid and the asking price themselves and are not directly connected to the real interbank market.

  • Liquidity: They provide liquidity to the market, which can be beneficial in less liquid trading instruments.

  • Costs: They usually do not charge commissions but make money through spreads.



Market Maker (MM) Trader Example


  • Profile: Emma is a retail investor who has recently started trading. She values simplicity and ease of use over technical details.

  • Trading Style: Emma prefers trading in major currency pairs and stocks. She trades on a relatively small scale and is not overly concerned about slight differences in trade execution speed or minor spread variations.

  • Why MM Suits Her: A Market Maker broker is ideal for Emma because it offers a user-friendly platform, fixed spreads, and the assurance of trade execution. Since MM brokers often provide their liquidity, Emma doesn't have to worry about the complexities of the interbank market.

Trading Desk

A dealing desk is where brokers execute and trade financial instruments (Forex trades, equities, commodities, and other instruments). The dealers facilitate trades on behalf of their clients and may act as the principal or the intermediary.

DIFFERENCES BETWEEN FX BROKERS

When opening a retail forex trading account, a critical review involves choosing among the different types of forex brokers available to manage your trades. It represents an important decision because the type of forex broker selected will affect the quality of service you receive and your transaction fees and dealing spreads.

Before describing the different Broker types, it is essential to clarify a dealing desk since the brokers' characteristics will depend on whether they manage a dealing desk. A dealing desk is where brokers execute and trade financial instruments (Forex trades, equities, commodities, and other instruments). The dealers facilitate trades on behalf of their clients and may act as the principal or the intermediary.

When categorizing brokerages in terms of their order execution methods and market interaction, they are commonly divided into three types: Market Makers (MM), Straight Through Processing (STP), and Electronic Communication Network (ECN) brokers. Following, there's a brief overview of each.

20.12.23

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