ECN and STP are the same as far as trade execution is concerned. They differ only in terms of the way they are marketed. Continue reading to understand more about this.
The Forex industry has done an awesome job of confusing the life out of a trader with acronyms, much like the various spying agencies around the world have done the same.
STP and ECN are two very commonly used, and abused acronyms in the Forex industry.
In this article, I will attempt to demystify these two words and provide some insights into what they mean, why they are different and what impact either of those have on a trader or a trader’s trading strategy.
STP – Straight Through Processing
As the acronym says, STP stands for Straight Through Processing. In plain english, it means that a broker that is a true STP broker will never hold your orders and pass them “straight through” to the interbank market/liquidity provider for clearing (processing).
In the dog-eat-dog world of Forex, in my opinion, STP is the most honest and truthful business model and while the profit from such a business model isn’t anywhere close to that from some of the other business models, it is one that in perfect alignment with the job description of a broker – to facilitate trades and make a small commission for this facilitation.
In an STP broker business model, the broker does not assume any risk from your trades. If you lose, you lose directly to the interbank market. If you win, you win from the interbank market. An STP broker has no incentive in you winning or losing except for the fact that if you keep losing money, you won’t be trading for very long.
Typically STP brokers charge a commission for each side of the trade. For example, if you buy 1 Lot of EURUSD, you may be charged $x for the buy side and when you close that trade, you will be charged another $y for the sell side of the trade. This is typically known as a round trip commission. So when asking an STP broker about their commission, be sure to verify if the commission amount quoted is for one side or round trip.
The spread may or may not be marked up by an STP broker. What does that mean? You see the interbank market provides its best Ask and Bid prices to the STP broker with what’s known as “RAW” spreads. The STP broker then marks up that spread by a few points (1 pip = 10 points) and provides it to you. Anything from 5 points to 15 points is considered to be an industry acceptable markup on spreads these days. Pre-2012, I have seen spreads being marked up by 45-75 points and traders had no choice.
Plug: At Manhattan Global Markets, we do not believe commissions are fair on traders. Hence for our STP accounts we charge ZERO commission on all trades and only make money from the spread which is always 5 points on top of the RAW ECN spread.
ECN – Electronic Computer Network?
Sounds so high tech…no? Well, if there were no ECNs, there would be no retail Forex trading. However, ECN is a very mysterious term used by many brokers to “fudge” their real business model.
A true ECN broker provides you with raw spreads and charges a fixed commission on a “per-million” basis. Per million? Well, when you trade 1 LOT EURUSD, its 100,000 units or $100,000 against Euros (depending on the direction of your trade). 10 Lots = $1,000,000. So when an ECN broker tells you that their commission is $30 per million, then that usually means that they will charge you $30 for every million in open positions and $30 when you close those positions. So its actually $20/million round trip or 0.2 pips on top of the spread.
Confused about how $60/million became 0.6 pips?
Ok… here’s the explanation.
Using EURUSD as an example, we know that 1 pip = $10 for each lot. 1 million = 10 lots or 1 Lot = 100,000…right?
So if you consider the fact that your ECN broker is proposing to charge you $60 per million (round trip), that comes to $6 per lot which, when expressed relative to the dollar value of every pip, comes to 0.6 pips or 60 points.
So what is the difference?
As you can see, both STP and ECN acronyms are about the way a broker prices himself in the market. It has very little to do with how the broker processes your trade. Both ECN and STP trade execution has to go straight to the network without any manipulation in between. So effectively ECN and STP are the same as far as trade execution is concerned and different only in terms of the way they are marketed.
STP or ECN – What’s better for a trader?
This depends on three things.
- Your trading strategy – how sensitive is it to spread? Do you scalp for half a pip or are you usually picking up 5-20 pips on each trade.
- How much deposit do you have? ECN brokers want bigger deposits because they need to ensure you will trade enough volume to make it worth their while.
- What’s your average monthly trading volume
Given the choice, a trader should always opt for an ECN broker (Institutional Forex Trading Account) because if you’re a high volume trader, that’s the best overall solution for the lowest cost of trading. But bear in mind, you will need a bigger deposit, higher volumes and most likely be subjected to minimum monthly fees in case your volume doesn’t stack up.
Dealing desk brokers are now starting to pose as ECN brokers, offering you instant execution, raw spreads and low commission to secure your account. No ECN or STP broker can provide you with instant execution because it doesn’t exist in the real market. Instant execution is only possible if you are a dealing desk broker executing the trade instantly when you receive it from your trader.
A true ECN/STP Broker MUST pass your trades to the interbank market (liquidity provider) and that, as you can imagine takes time, which means, the execution of your order is NEVER EVER going to be instant.