ECN and STP....

Whats the difference between STP and ECN?

Not an expert, but this is what my understand is.

The short version is that STP/ECN brokers do not take the other side of trades, but send or match trades directly with the banks/liquidity providers. This is different from dealing desk market makers who would "trade against you" taking the other side of the trade and then deciding what to do with it (match it with another acct, send it to liquidity provider, or hold on to it themselves).

The longer version:

STP stands for Straight-Through Processing (or Straight-Thru Processing). This means your order is routed "straight through" to the bank(s) offering the market price listed at the time you click submit. When the banks accept your order. Depending on liquidity and the speed of the platform/internet connection, this can take milliseconds or a few seconds. Some platforms have a DOM-style level II quote system (ladder-style visual of current and nearby prices) so you can see the prevailing bids and offers and volume of each. Another potential attribute of level II quotes is to see fractional pricing (5 and 6 decimal pricing). And perhaps even see the names of the banks or customers offering these.

ECN stands for Electronic Clearing Network (or Electronic Clearinghouse Network or Electronic Communications Network). Technically, in a true ECN, client bids and offers are matched by the software to the banks, traders, or other liquidity providers exact opposing orders 1 for 1. Similar to what Chicago Merchantile Exchange (CME) or the NASDAQ does. It Like STP, and ECN could also have a level II quote system for you to see current and nearby bids/offers/liquidity/liquidity providers depending on the broker.

So how does the STP/ECN broker get paid? 2 different ways. Either by
1) Adding x.x pips to the natural market spread that you see when you go to click to order (charging no up front commissions), or
2) providing true raw market spreads to the trader(i call them natural spreads), then charging a separate commission per trade.


Often times, I see that STP and ECN are used interchangibly, and technically you could can because an STP has to Electronically Clear their trades via the banks they are passing off to, and yet an ECN can be setup to send the orders Straight Through to the banks or other customers. See how you can play both phrases?

The whole STP/ECN thing became important because it was a marketing ploy of differentiating themselves from dealing desk (human or electronic) market makers that use dealing desks (sometimes called bucketshops) or even those that claim "no dealing desk" but they are still taking the other side of the trade (i.e. "making the market")

Theoretically, a dealing desk can take the other side of the trade and immediately hand it off to either another trader in their system, or their liquidity providers (other brokers or usually banks). They could also hold on to that opposite trade and be "trading against you", so to speak. This became a huge concern for traders, especially those that scalp manually or use Expert Advisors or other automated techniques. Because the broker could then artificially manipulate/inflate the platform price to favor themselves (and thus be UNfavorable to the individual trader). Especially during news trades.

There are several threads about this all over this forum. And i'm sure you read some of them and then wanted to know what all the hype was about STP/ECN. So here you are reading this and here I am typing it.

So many brokers now like the title of STP/ECN and use them to attract smaller and medium capital traders that have become more savvy about dealing desk. A very popular claim for all brokers now is that they have "no dealing desk", although few actually live up to the claim. The dealing desk is electronic instead of human.

So since the broker is always going to be the middle man anyway, it's just a matter how how they take their profit (either in the spread, or charging separate commission, or both sometimes). The main issue is HOW they handle the trade in their execution platform.

I hope i answered the original question. I remember reading another long article on the subject either by one of the admins of forexfactory.com or some other thing about dealing desk vs ECN vs other execution platforms.


update: Now that I think about it, futures and stock exchanges are slightly different from forex ECN/STP in that forex is not centralized. So that is why you can see that several forex brokers can all have contracts with major banks, but have different agreements with each bank or liquidity provider. So the spreads/liquidity could be slightly different at the exact same time of the day. So at the futures/commodities exchanges, all orders regardless of where they come from ultimately pass through 1 central point and are processed on a FIFO basis (first in, first out) based also on liquidity of course.

update 2: here is a link to an EXCELLENT Article on market makers and ECN/STPs. This is part 2 dealing with ECN and STP. The first half deals with Market Makers. This website is a great "here's what's going on in the fx industry" kind of site. He keeps up more with regulations and broker moves and questions things from a trader's prospective.

that was awesome

Stocks are not centralized either, there are many different venues where the same stock can be traded (exchanges, ECNs, dark-pools, even OTC). The difference is, that due to regulation, a broker has to fill an order with the best price available (except if the trader himself routes the order to a specific ecn) - whereas in f/x a broker does not have such an obligation.

Right. But I was referring to stocks/commodities that are traded at an exchange.

I updated my first reply to an article that explains market makers vs STP vs ECN.

But the article's conclusion was similar to mines above and also at this post (you really don't know what's going on with your behind the scenes). There's very little transparency. I guess you would have to have it in writing how the orders are processed like FXCM does with it's institutional accts.

Dear ybfjax,
Thank you for your descriptions. I want to start my forex activity but unfortunately many forex brokers do not open real account for me because I am from Iran and we are still under sanctions!
May you introduce a real broker which is good from your point of view in Cyprus or maybe other open land that no trade against me.
Thank you in advance
omid Yavari

thats really interesting reading.....seems like majority of brokers have the temptation to trade against the client since the reward is much bigger than just spread if all the order are true STP/ECN

ECN could be divided under two words:
1) PURE ECN (Only one broker i kbow) -no DD villa at all.
2) STP ECN (almost semi-market maker) -have a VERY big building for DD

Here is the second part of the article yb posted.

http://www.financemagnates.com/forex...y-are-part-22/

"STP Broker is a type of a Market Making broker."

There is nothing wrong with market making brokers as long as they regulated in the us or uk. Regulated brokers might lose their license if they trade against their clients in the way to make them lose.

There are 4 ways a broker allows you to execute .

B-Book Broker takes the other side of the trade without passing it through to the liquidity provider.
A-Book Broker Internalises the trade and tries to make extra profit on the spread before passing on to the Lp.
ECN Brokers allows other broker clients to trade against each other before passing onto the external LP if not matched.
STP Order is passed directly to the LP without any interference by the broker.

awesome post! but who are the brokers that actually offer real ECN/STP

Thank you very much.
really awesome post

The main difference between STP and ECN is the number of liquid providers.

Both are NDD that do not play with orders in theory.
ECN brokers connect to a whole bunch of prime brokers and banks so orders can be filled at best possible offer on top of many offers. STP only have connections to a few market makers, liquid providers so orders are sent directly the chosen few and that is why is called straight through processing.

I am not an expert.
The above is just basics.

This is in my opinion a long debate however we should do some research on finding the right broker which is either STP/NDD/ECN. All that is needed to be avoided is a market maker broker i guess.

Which platform is more appropriate to the concept of scalping ?
ECN or STP ?
any advantage from one more

Scalping.. What time frame ? What execution platform ie MT4 ? What amount size ?

It depends on the lots size you plan on trading with. For and ECN account you will be charged a commission (normally around $3 per lot, but dependent on the broker) that you will first have to cover, as well as the slight spread, before being able to make a profit.
With a STP broker, no commission is charged, but the spread difference is larger than the ECN account.

If you plan on trading large lots, then look more at a reliable ECN broker as it will be easier to cover the spread difference with a smaller market movement. If you are going to be trading small lot sizes, then focus more on finding a good STP broker with the smallest possible spread.

Both account types have advantages and disadvantages. You will just have to see which one is more suited to your needs.

My friend this has nothing to do with commissions.
Its a methodology and the way trades are transacted.
An ECN is a dark pool of liquidity whereby each member can trade against each other.
The retail world have hijack the name for marketing purposes only. Infact they call it ECN "style" which is utter bogus.

With STP meaning Straight Through Processing the customer order isnt internalised by the broker or B- Booked.

Mark ups or commission can still be applied in either execution methods.

As for larger lot sizes the STP method is better.
Brokers who have direct lines with banks via prime broker can tailor the execution with minimal market impact or in other words limit slippage.
They also offer other platforms other than MT4 which have specific features for executing larger orders.

https://www.forexfactory.com/showthr...8#post12524048

From the perspective of a trader, not much, you supposed to still get filled to the market rather than a brokers book (dealing desk) - simple terms, ecn combines a network of lps and aggregates the price and filling process