STP Forex brokers
(No Dealing Desk + STP)
STP Forex brokers is the most diverse group when it comes to trading conditions.
Ranging from STP brokers who act almost like a Market maker, to STPs who offer advanced DMA trading.
While all STP brokers offer No Dealing desk (NDD) trading and Straight Thought Processing (STP), which eliminates conflict of interests, there are 3 factors that stand them apart:
- Order execution type
- Number of liquidity providers
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No Dealing Desk means STP
Any Forex broker that doesn’t run a dealing desk nowadays is called an “STP broker”.
But STP brokers can be different:
Broker A – a no dealing desk IB (introducing broker) who simply passes all client orders to the Prime broker – calls it “STP”
Broker B – a no dealing desk broker, who fills client orders himself using Instant execution, and then immediately (and automatically, without human intervention) offsets 100% of those orders with own liquidity providers – calls it “STP”
Broker C – a no dealing desk broker, who passes all client orders directly to the liquidity providers using Market execution – calls it “STP”
What kind of STP is each one of these brokers?
STP – Straight Though Processing – means that there is no dealing desk involved in quoting & controlling market prices (no market making), but instead all orders are passed through to Liquidity Providers (other brokers and banks), where they are executed at the bid/ask rate given by those Liquidity Providers.
So, an STP broker with no dealing desk will direct all orders to Liquidity Provider(s). What happens next?
A Liquidity Provider (LP) always acts as a Principal and a Conterparty to your trade. An LP takes the other side of your position, while looking to make profits by closing this position later in a trade with another party.
(Same as with ECN brokers, who pass your trades to an ECN pool, where other liquidity providers – banks, hedge funds, brokers, investors – become a counterparty to your trade).
Thus, in the end your order always meets a Liquidity Provider, who is a final Counterparty to your trade.
3 ESSENTIAL COMPONENTS of an STP
There are 3 essential components that will help you to learn more about any STP broker:
1. Depth of the liquidity pool (number of liquidity providers)
2. Type of the spread (fixed or variable)
3. Type of execution (instant or market)
1. Liquidity providers and Depth of the liquidity pool. Why it matters?
Unlike ECN brokers who send orders to ECN liquidity pools with a large number of liquidity providers trading on the Interbank, an STP broker has it’s own “internal liquidity pool”, which consists of a smaller predetermined number of liquidity providers – only those with whom an STP broker has signed a business contract. Those Liquidity providers will then compete for providing the best bid/ask rates for orders coming from an STP broker.
The more there are liquidity providers in the system – the deeper is the liquidity pool.
It’s worth mentioning that if an STP broker has only one Liquidity Provider (LP), there will be no price competition among LPs, and therefore it’ll be equal to just adding yet another “middleman” into the trading. These days Forex brokers try to have more than one liquidity provider to be able to offer deeper liquidity, better bid/ask quotes and, as a result, lower spreads.
2. STP spreads: fixed vs variable?
STP brokers nowadays are known to offer both types of spreads: fixed and variable.
An STP broker with variable spreads works in a way similar to ECN model (but inside its own internal liquidity pool): while liquidity providers compete to offer the best bid/ask prices, an STP broker will pick the best Bid price from one liquidity provider and the best Ask price from another liquidity provider and deliver the best current spread to own clients (+ own small mark-up, which allows an STP broker to earn its profit).
An STP broker with fixed spreads won’t adjust spreads for the clients based on the lowest bid/ask prices offered by Liquidity providers. The spreads will remain fixed all the time.
If an STP broker has only 1 liquidity provider, this Liquidity Provider will act as a single counterparty to all client trades. In this case traders are at the mercy of the liquidity provider, who decides which prices to quote and when.
If there are several liquidity providers, but the spreads remain fixed, this means that an STP broker uses its own back-office price matching engine, which ensures that a broker is able to make profits on spread difference. To do that, a client is charged a fixed spread, which is higher than the best available rate a broker can get from the LP(s). A broker then earns on the spread difference while immediately hedging this trade with an LP at a better rate.
3. Instant vs Market execution?
As practice shows, when it comes to reading about trading advantages on brokers’ sites, the term “Instant execution” can be used differently:
Version 1: “Instant execution” in reference to the speed of order execution: fast, instantaneous order processing.
Version 2: “Instant execution” in reference to the method of order execution: an execution technology used on the trading platform. (Traders can find it in the order window when they open/close positions).
We’re interested in the second definition – “Instant execution as the method of platform order execution”.
Instant execution means that the order won’t go to the market (it’ll be instantly filled by your broker).
Market execution means the order will go to the market (where it’ll be filled based on available quotes from the liquidity providers).
STP brokers who offer Market execution provide true Direct Market Access (DMA) trading to their clients.
|A summary – conditions comparison – for all STP brokers:
|Spreads quotes come from the broker, or from just 1 liquidity provider
|Quotes come from several liquidity providers, with spreads generated based on the best bid/ask quotes from liquidity providers
|Client orders are filled by the broker, who then may (or may not) offset own risks with liquidity providers – therefore it’s a less transparent model
|Client orders go to the market, where they are filled by liquidity providers – more transparent model
|One liquidity provider
|No price competition, one liquidity provider controls the width of the spreads
|Several liquidity providers
|Liquidity providers create price competition, which results in better spreads for the clients.