ECN Vs STP
One of the most common demands from retail Forex traders is for online brokers that will never, ever, trade against them. Many traders feel that a broker taking the other side of their trades and therefore standing to profit from their losses and lose from their gains is an unacceptable conflict of interest and they find it difficult, if not impossible, to trust any broker that does this to execute their trades at a reasonable price and treat them fairly.
All Market Makers, that is, brokers with a dealing desk, initially take the other side of their clients trades, but most of them do not actively seek to trade against their clients, let alone cheat them. Most Market Markers in actual fact attempt to ‘match’ their client’s trades with the trades of other clients and then hedge the difference in the market and profit from the spread. However there is still no getting away from the fact that Market Makers could, if they actually wanted to do so, remain as the counter party to their clients trades and profit from their losses, and many traders simply aren’t prepared to trust any broker that could do this, even if there is no evidence that they are actually doing so.
For traders who refuse to trust any Market Maker their only option is to trade with Forex Brokers that don’t have a dealing desk; these brokers are often referred to as No Dealing Desk brokers or NDD brokers for short. NDD brokers usually fall into one of two categories, STP or ECN -
STP stand for Straight Through Processing which describes exactly what these brokers do with their clients trades. They never take the other side of their client’s trades and then seek to match them with the trades of other clients as Market Makers do. STP brokers simply pass all the trades placed with them directly to a liquidity provider. In practice traders will probably not notice much difference between trading with a Market Maker Vs trading with an STP broker, but they will have the reassurance of knowing that their broker is never taking the other side of their trades and has no potential vested interest in seeing them fail. If anything, the opposite would be true. STP brokers have a vested interest in their clients succeeding and making money so that they keep on trading with them – it would not be in an STP or ECN brokers interests for their clients to lose all the money in their trading accounts as most people would probably stop trading if this happened.
ECN stands for Electronic Communications Network and unlike some STP brokers, a true ECN broker will not even profit from the spread. True ECN brokers profit from applying a small commission to each trade (usually about $5 for every $100,000 traded). ECN brokers therefore have the lowest spreads possible, sometimes as low as 0.1 pips on currency pairs like the EUR/USD during times of high market liquidity, and their spreads are never fixed as the true bid/ask prices in the actual foreign exchange market are never fixed.
ECN brokers also allow their clients to interact with each others orders by providing a marketplace where all the market participants (banks, financial institutions, retail traders, and even the Market Makers themselves) are treated equally and can all trade against each other as they each send their own competing bids into the system. To be a true ECN broker the broker must also display the Depth of Market (or DOM) data in a window on their trading platform to allow each of the marker participants to see their own order(s) and the orders of all the other market participants allowing each person to see exactly where the liquidity is.
True ECN brokers therefore offer the ‘purest’ form of Forex trading that there is. All the market participants are treated equally, every market participant can see exactly where everyone else’s orders are in the system, and the broker providing the market place is never trading against anyone and is completely upfront about exactly how much commissions they are earning from each trade.