Table of contents:
- 1 STP Broker: Interesting facts about the market model
- 2 Quality criteria for STP brokers
STP Brokers do not trade against their customers, but simply forward orders to a bank pool for a fee and thus act as service providers without any conflicts of interest. In practice, however, this is not without exceptions.
In the following you will learn what distinguishes true “Straight Through Processing”, STP for short, from mixed market models, what quality criteria make good STP brokers and for which traders the providers are suitable.
STP Broker: Interesting facts about the market model
STP brokers forward orders to a bank pool
- Brokers can earn money through commissions and markups on spreads
- Some STP brokers match part of the orders in-house as market makers
- Ideally, trading is cheaper than with market makers and free of conflicts of interest
- In the worst case, STP is covert market making
- Functionality of STP Trading
- STP stands for “Straight Through Processing” and refers to NDD (No-Dealing-Desk-Broker) market models, in which customer orders are forwarded to a bank pool without broker intervention.
This may involve a larger interbank marketplace or a liquidity pool specially initiated by the broker. The bundling of several liquidity sources can also be considered.
Brokers act as service providers in this market model. Brokers are at no time the counterparts of the trading customers. Therefore, STP brokers are considered a better alternative to market brokers with regard to potential conflicts of interest, who execute customer orders themselves and externally hedge net positions occurring after internal netting at their own reasonable discretion or not.
Distinction to ECN and Market Making
The differences to market making are thus very clearly outlined.
STP brokers are remunerated for forwarding orders to the interbank market and have no influence on the prices provided by the liquidity network.
The difference to ECN brokers requires a look at the details. With STP Brokers, each order goes through the banking pool – it is impossible for a trader’s order to be “matched” with an opposing order from another trader. In principle, this is possible when trading via an ECN.
ECN brokers connect their customers directly to a trading network. Traders, banks and other market participants can place orders directly in the order book, which are automatically matched according to defined rules. In the best case, trading is possible without spread. In addition, all customers connected to an ECN can view the order book and thus the market depth.
STP brokers can give their customers insight into the market depth, but do not necessarily have to.
How does an STP broker earn money?
An STP Broker can earn money through commissions (e.g. 4 € per standard lot) and/or through markups on the spreads of the bank pool. If the latter is the case, the spread in the client’s trading interface will be e.g. 0.50 pips wider than it actually is in the bank pool.
Particularly with regard to the transparency of the market model, STP brokers with a business model based solely on commissions are preferable.
The biggest problem with markup models is that their composition is ultimately not comprehensible from the outside.
Two hypothetical and yet practical examples are given here.
Algorithms could provide for variable markups on spreads. Then it is completely unclear to traders what criteria are used to adjust the markups. Volatility? Time of day? Demand behaviour?
Markups on the spreads are equivalent to changes in the prices of the interbank market. In the worst case scenario, an STP broker could implement measures that malicious tongues would chant after market makers in particular – e.g. a sudden widening of spreads for the purpose of “stop phishing”.
Weaknesses and uncertainties of STP brokers
Not all brokers who call themselves STP brokers actually offer this market model.
The term “STP” is not a protected term. A broker could therefore adorn his offer with this characteristic without actually offering such a market model. In order to be able to assess the market model of an STP Broker, traders are not least dependent on information from the broker.
Some brokers operate a two-pronged approach and forward part of the customer orders to their bank pool. The remaining part, on the other hand, is processed internally by way of market making. The broker’s contracts with the banks are a key factor in determining which route an order takes. For example, if the contracts provide for contractual penalties for too large a proportion of very small orders, the broker will act accordingly.
The nature of the liquidity pool is also decisive for the quality of a market model. In the worst case (and by no means an unrealistic one), the “pool” consists of just one single bank. This bank then acts de facto as market maker.
It is not only the number of connected banks that is decisive, but also their relationship to one another in the market model. In the best case, several Tier 1 banks from identical positions compete for customer orders. The prices in the trader’s trading interface then originate from several banks. In addition, the banks should not receive any information about limits, stop-loss orders etc. of the customers.
Quality criteria for STP brokers
INFORMATION ON THE MARKET MODEL
Therefore, detailed and as comprehensible as possible information on the market model and the order flow are a decisive quality criterion in the STP broker comparison. It is advantageous if the banks connected to the pool are specifically named.
Pay attention to the details in the information.
Are only “the best prices” forwarded, or necessarily the “best bid and ask prices”, whereby the bid and ask prices can come from different banks?
Is there a primary bank or do all banks bid from an identical contractual position?
Do the broker’s statements appear credible in view of his own position as a company?
Features of the trading platform
A transparent market model that is not burdened by conflicts of interest is a necessary but not sufficient condition for a good broker. The trading platform should also meet advanced and preferably professional requirements.
Find out about the decisive performance features:
- What functions does the charting tool offer?
- Are there possibilities for developing and back-testing automated trading systems? If so, do you need knowledge of a programming language?
- Are scalping and hedging permitted?
- Which order types are available?
- And last but not least: Are there webinars, tutorials and other training courses with substance?
STP brokers compare regarding Trading costs, regulatory environment and service
A decisive criterion is the trading costs, which consist of spreads, commissions and financing costs. It is also worth taking a look at the typical spreads of brokers with an exclusive commission model, as their width depends on the nature of the bank pool.
The lower the commissions, the better – some brokers scale their commissions degressively depending on the monthly order volume.
The regulatory environment is important for several reasons:
- Firstly, the supervisory authorities in established financial centres such as the UK are stricter than in locations such as Cyprus.
- Second, for brokers with their own banking licence, location also plays a role in deposit protection. Brokers without a banking licence should hold client funds in segregated accounts at banks linked to the national deposit guarantee scheme of a core EU country.
- Thirdly, the location of the broker’s registered office plays a role for the final withholding tax. For brokers domiciled in (e.g.) Great Britain, the tax is not automatically paid. Instead, account holders assess the tax in the course of their tax return and thus pay the amounts due much later.
Which type of trader should choose STP?
STP brokers are suitable for both day traders and position traders.
STP brokers are the right address for traders who do not (or no longer) want to trade via a market maker. Good STP brokers earn money exclusively through commissions and are therefore not burdened by conflicts of interest. The spreads of a good market model should be very tight, which minimizes trading costs.
STP market models are only relevant for FX trading. The counterpart to STP in equity trading are DMA market models. Here, equity CFDs are traded at the actual prices of the reference exchange(s).
Technically, the CFD broker places an order in the order book of the exchange. At the same time, a contract for the settlement of differences is created between the broker and the customer with the stock exchange price as settlement price.
This is how the STP Broker comparison of Day-Traders.net works
In the STP Broker comparison of day-traders.net you can search for STP brokers.
For the most individual cost comparison possible, you can specify the number of weekly trades, the average position size and the preferred traded instrument.
For each individual broker you will find clearly arranged brief descriptions with all important information and detailed profiles.
In the course of the research not only criteria such as spread and minimum deposit were determined, but also trading platform, margin requirements and many other details.
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