Many are confused as to what STP means. Beginners see it and think it must mean spot transaction processing or something similar. In one sense they would not be wrong. An STP broker does have spot transaction processing; however, the exact lingo means straight through processing. In forex trading you can have STP or STP and ECN setups for a no dealing desk broker. The following will explore STP in more detail.
Forex Trading with STP Brokers
STP brokers are not ECNs. They just offer a platform that enables straight through processing, where the platform does most of the work. The broker just makes certain the trade is able to get through to the right client based on the rates chosen by the client or trader. The system ensures the trade goes from the trader directly to the liquidity provider which is linked with the interbank market. Usually in forex trading the no dealing desk STP is going to have more than one liquidity provider. With an STP broker they have a table that will show the liquidity providers and the bid/ask prices for currency pairs. The best to worst bid/ask prices are usually provided, in which the best price available at the time is shown to the client. You would not see these different quotes on the platform you use for forex trading. Instead, you see the price the broker is going to charge you. This price will usually include the spread unless the broker elects a commission based programme.
What the broker might see for a rate on EUR/USD is 1.2000/1.2002, but you see 1.2003/1.2005. Your pip spread is 3, but the broker is charged 2 pips. The broker will route the trade to the liquidity provider offering the best rate to them. It ensures a better price for the trade in terms of profit. STP brokers usually need variable spreads in order to work the forex trading system.
Forex Trading ECN Brokers
ECN brokers are different because you can interact with orders and participants on the ECN network. Banks, hedge funds, other brokers, and retail traders can all trade against the other. In this case it really is the best available price competition in forex trading. The clients or traders get to see how deep the market is. ECNs are more likely to charge commissions because fixed and variable spreads do not work well for the ECN operator.
They are unable to get a spread or a large enough spread to cover their costs when you can see the actual interbank rates. In this situation the commission is usually small, but nevertheless it is there to ensure the ECN can continue operating.
The setup of broker types ensures you have at least three choices for how you can trade. Some traders do not mind paying commissions because it means a more direct deal with the liquidity provider, i.e. the company selling or buying the currency you want. Others go with STPs for the lower spread and to take the middle man out of the equation. You can make the choice in how you will conduct forex trading.