ECN Forex Brokers
Defining an ECN Forex Broker
A Forex broker that uses the ECN network (Electronic Communications Network) to offer its clients direct access to orders of large participants in the global currency market.
What is Actually an ECN Forex Broker?
ECN stands for Electronic Communication Network. ECN Brokers provide traders direct access to the Foreign Exchange market. An ECN broker does not have a Dealing Desk and all the orders of its customers are passed directly to the liquidity providers (major commercial banks).
Linking with the Liquidity Providers
ECN brokers get connected with large banks (tier-1 liquidity providers) using a standard setup called Financial Information Exchange Protocol (FIX Protocol).
Two Main Types of ECN Brokers
There are two general categories of ECN Brokers:
(1) Retail ECN Brokers
(2) Institutional ECN brokers
Institutional ECN brokers offer better trading terms than the Retail ECN Brokers. Institutional clients include banks, hedge funds, large importers/exporters, etc.
What is an STP Forex Broker
Definition of STP Order Execution
STP means 'Straight Through Processing' and it is a technique that optimizes the speed at which trading orders are processed and executed. This technique allows the automatic settlement of orders (same-day settlement) without manual intervention.
What is an STP Forex Broker?
STP Brokers are Forex Brokers using the 'Straight Through Processing' as their main execution model to transfer directly the trading orders of their clients to liquidity providers. Liquidity providers include Banks, Investment Corporations, Hedge Funds, or even another Forex broker. Actually, STP brokers consist of the middle selection between Dealing-Desk brokers (Market Makers) and pure ECN Forex brokers.
STP Broker Quotes
STP brokers are displaying their own quotes which are tightly correlated to the actual ECN interbank quotes. The linkage between an STP broker and its liquidity is based on complex algorithms that are able to distinguish the nature of any order and then execute it instantly.
Trading Cost when trading with STP Brokers
As in the case of ECN brokers, STP brokers have access to many different liquidity providers, allowing them to offer tight spreads.
STP brokers make profits from:
(1) From the spread between ask and bid (usually EURUSD spread 1.1 to 1.9 pips without commissions)
(2) Some STP brokers may charge trading commissions, but most STP brokers make money only by the spread.
What are the Advantages of Trading with an STP Forex Broker?
STP brokers are currently very successful in the Foreign Exchange market as they can combine some of the advantages of ECN brokers with the advantages of Dealing-Desk brokers:
(1) Fast Order Execution without delays (as ECN brokers)
(2) Tight spreads especially as concerns EURUSD, GBPUSD, and USDJPY (as ECN brokers)
(3) Normal SWAP charges for overnight positions which make them convenient for long-term traders (as ECN brokers)
(4) Great selection of trading platforms allowing Automated Trading, Scalping, and Hedging (as ECN brokers)
(5) No Dealing Desk, meaning no conflict of interest and that is why an STP broker is considered transparent with its clients (as ECN brokers)
(5) Low minimum account requirements, which is usually 100USD (as Market Makers)
(6) Welcome Bonus promotions, usually in the form of credit bonus (as Market Makers)
(7) The anonymity of Trading, as an STP broker has no Dealing Desk monitoring their client orders. All trading orders are executed anonymously and automatically via the liquidity network (as ECN brokers)
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