How does STP broker makes money? | Forex Factory

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How does STP broker makes money?

  • #1
  • First Post: Aug 18, 2010 3:01am Aug 18, 2010 3:01am
Hi,

I understand that the broker makes money on the spread which is the difference between the bid and ask. They sell to you on the bid price and immediately try to buy it back from the market at the ask price. This is why they are market makers. They make the market for you.

But when a broker is STP which means they pass your order straight through to their liquidity provider, that liquidity provider such as a bank becomes the market maker. How can the STP broker still make money from the spread since they are not doing the buying and selling between you and the market?
  • #2
  • Aug 18, 2010 3:13am Aug 18, 2010 3:13am
Quoting mindreality
Hi,

I understand that the broker makes money on the spread which is the difference between the bid and ask. They sell to you on the bid price and immediately try to buy it back from the market at the ask price. This is why they are market makers. They make the market for you.

But when a broker is STP which means they pass your order straight through to their liquidity provider, that liquidity provider such as a bank becomes the market maker. How can the STP broker still make money from the spread since they are not doing the buying and selling...
A true STP broker charges a commission. If they don't they aren't STP. Also, they can still pad the spread for themselves as well. You won't find any that openly admit that, but it does happen...
  • #3
  • Aug 18, 2010 3:28am Aug 18, 2010 3:28am
So for those who don't charge a commission, they make money by padding the spread and then getting a rebate from their liquidity provider right?

E.g. Liquidity provider (such as a bank) normally has spread of 1 pip. The broker pads it to make it 2 pips. Broker passes your order straight through to liquidity provider. Liquidity provider sells to you at the increased bid price and buys it back asap from the market at the usual asking price. Liquidity provider makes 2 Pips and rebates your broker 1 Pip. Correct?

If they don't charge commission or pad the spread, how on earth they make money right?

At least they are not bearing the risk by trading against you directly, but passing it straight through their liquidity provider.
  • #4
  • Aug 18, 2010 3:39am Aug 18, 2010 3:39am
Quoting mindreality
So for those who don't charge a commission, they make money by padding the spread and then getting a rebate from their liquidity provider right?

E.g. Liquidity provider (such as a bank) normally has spread of 1 pip. The broker pads it to make it 2 pips. Broker passes your order straight through to liquidity provider. Liquidity provider sells to you at the increased bid price and buys it back asap from the market at the usual asking price. Liquidity provider makes 2 Pips and rebates your broker 1 Pip. Correct?
I don't know anything about LP's giving rebates, although they might do that. But if the spread is padded it's the broker pocketing the money. They would be padding prices they get from the LP, so the LP really has nothing to do with it. And at a true STP, there isn't just 1 LP. I have an account at Advanced Markets and they claim to have 10 banks providing liquidity, and they simply show the best bid and the best ask regardless of what bank it's from. So you could see a bid from Goldman Sachs and an ask from Citibank for example.

Not saying all STP's do that (pad spread), just saying it's possible for them to if they want to. The good ones just charge a commission and that's it.

But keep in mind if it's a market maker instead, that all orders are in house anyway, meaning they don't send anything to a liquidity provider, but just provide a price feed, and hope you lose in your trading.
  • #5
  • Aug 18, 2010 4:06am Aug 18, 2010 4:06am
You don't get the difference between STP and ECN,

ECN scheme - they take a commission per round turn. STP - they do not take any commission, but markup the spread (pretty much to the same amount).
  • #6
  • Aug 18, 2010 4:08am Aug 18, 2010 4:08am
this should clear this up take a look
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  • #7
  • Aug 18, 2010 4:18am Aug 18, 2010 4:18am
Quoting fxoxford
this should clear this up take a look
Good clarification. Brokers also call themselves so many different things I think I get confused sometimes. Advanced Markets calls themselves a "DMA" broker (direct market access), and contrasts themselves to ECN's, but not sure I really see the difference. I've always thought all STP brokers do charge a commission, as well as possibly marking up the spread, but I might not have had that quite right I guess...

All good
  • #8
  • Aug 18, 2010 4:22am Aug 18, 2010 4:22am
Quoting TC East
Good clarification. Brokers also call themselves so many different things I think I get confused sometimes. Advanced Markets calls themselves a "DMA" broker (direct market access), and contrasts themselves to ECN's, but not sure I really see the difference. I've always thought all STP brokers do charge a commission, as well as possibly marking up the spread, but I might not have had that quite right I guess...

All good
thanks, here's a great site that explain the inside of forex broker, scroll down the page and you will see how they explain forex brokers, take a look:

http://www.100forexbrokers.com/stp-ecn-brokers
  • #9
  • Aug 18, 2010 5:05am Aug 18, 2010 5:05am
Quoting fxoxford
thanks, here's a great site that explain the inside of forex broker, scroll down the page and you will see how they explain forex brokers, take a look:

http://www.100forexbrokers.com/stp-ecn-brokers
Great resource for those questions...thanks
  • #10
  • Aug 18, 2010 5:07am Aug 18, 2010 5:07am
Quoting fxoxford
thanks, here's a great site that explain the inside of forex broker, scroll down the page and you will see how they explain forex brokers, take a look:

http://www.100forexbrokers.com/stp-ecn-brokers
By the way, I love your avatar; that's classic! I see them too hehe. I get a chuckle out of that every time...
  • #11
  • Aug 18, 2010 5:20am Aug 18, 2010 5:20am
Quoting TC East
By the way, I love your avatar; that's classic! I see them too hehe. I get a chuckle out of that every time...
Makes Me Laugh Every Time I Post
  • #12
  • Last Post: Aug 18, 2010 5:42am Aug 18, 2010 5:42am
Quoting fxoxford
thanks, here's a great site that explain the inside of forex broker, scroll down the page and you will see how they explain forex brokers, take a look:

http://www.100forexbrokers.com/stp-ecn-brokers
Hi, you really seems to have "researched" the topic ! Thanks - had so-so idea - now it is much clearer - been always wondering how Brokers make their money - they are not all philanthrophists who have started the Broker business to facilitate money-making for Retail Traders !
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