ECN/STP Brokers Explained

June 27, 2013 2:53 pm

ecn_forexThere are three main types of brokers – Market Maker, ECN and STP. Each of these types has its pros and cons, and often inexperienced traders have a hard time determining the best type of broker for their needs.

Market Maker brokers are very popular, but they are also one of the worst types of brokers you can choose, because these brokers win if you lose money, and will therefore do their best to make you lose money. If you want to work with reputable, trustworthy and friendly brokers, then you should focus on ECN/STP brokers. In this article, you’ll learn about the differences between these brokers and why they are better than Market Maker brokers.

ECN brokers give the trader direct access to the real market. This means that the broker’s winnings or losses aren’t based on the success of the traders. Instead, ECN brokers rely on the spread to make money.

For example, if the spread of the GBP/USD currency pair is 0.3 pips, the broker will display a spread of 0.6 pips, so he’ll get 0.3 pips for every confirmed trade. Another thing that brings money to ECN brokers is the fact that they receive a commission per round turn lot traded. In most cases, this commission is 10$/round lot, but it might be less or more depending on several factors.

Keep in mind that ECN brokers have very high requirements in terms of investments and lot size – usually, you can’t make a deposit that is less than $1,000, and you can have a lot size lower than 1$/pip. ECN brokers are a great choice, but unfortunately these brokers aren’t accessible by small time traders, because they usually require a deposit of $50,000-$100,000.

ECN Brokers

Common problems that traders face when they use the services of an ECN broker are order rejections and re-quotes. These techniques are often by the broker if he spots that the real market price has changed after a trader opened a large trade. In this case, the broker must either reject the trade or ask for a price adjustment, or he can take a risk and continue with the trade. However, if the trade ends up being successful, the broker will need to pay the trader, and this is something that ECN brokers always try to avoid.

STP brokers have become quite uncommon lately, but many traders still consider them as one of the best choices. STP brokers are a bit strange, because they combine the characteristics of ECN brokers and Market Makers brokers. Their working method is a bit complicated, so read carefully if you want to learn more about STP brokers and how they operate. The strange things about these brokers is that they route trades to different places – basically, sometimes you directly trade with the broker, while in other cases you deal with the real market.

So, you are probably asking yourself – how do they decide if my trade should be executed on the real market or not? The answer is pretty simple – these brokers follow the activity of all their traders and by using complex algorithms, they determine if a trader is successful or not. Naturally, they send successful traders to the real market, while unsuccessful ones deal with the broker’s market. This way, the broker makes more money from unsuccessful traders, and loses less money by not dealing with successful traders.

ECN Brokers:

    ATG Marketplex
    ADS Securities
    AFX Capital

    STP Brokers:

    FX Cast
    Advanced Markets

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