ECN or STP Forex Broker, Which is Best for Traders?
Two types of forex brokers currently exist the most, namely ECN (Electronic Communication Network) and STP (Straight Through Processing). However, novice traders are often confused about which one is the best, because the features and services are similar or even there is no difference at all. In fact, even though they have some similarities, ECN and STP forex brokers are very different in terms of the order execution system and the structure of fees that must be paid by traders such as spreads and commissions. If you don’t recognize it, then you could be choosing the wrong broker. Check out the full review of this article.
STP brokers will pass trader orders to a “liquidity pool” consisting of many liquidity providers (Liquidity Providers) such as large banks, Hedge Funds, and/or higher level brokerage companies (Prime Brokers). In this process, the trader’s order will be executed by the liquidity provider who provides the best price. Brokers can apply the same rate as the liquidity provider’s rate, or add a mark-up to the spread as a service fee.
The advantage for traders, STP brokers can eliminate commission fees (Commission Fees) which are usually applied to each lot (trading volume), because the source of income can be transferred to a mark-up on the spread only. However, on the other hand, because the trader’s order is “thrown” to be executed by the other party, the trader cannot see Bid and Ask positions that appear in the forex market (Depth of Market / DoM). Therefore, STP brokers can also collude to pass traders’ orders to other companies in the same group, or pass orders to liquidity providers who give certain commission kickbacks. This drawback can be avoided if you know who the liquidity providers of the STP broker are, or if you use an ECN broker.
Features of ECN Broker
The main difference between ECN and STP brokers lies in their execution. ECN brokers act as “bridges” connecting traders directly with the network of international banks and other liquidity providers that make up a forex market. Thus, traders can also watch Bid and Ask positions that appear in the forex market (Depth of Market/DoM) in real-time. Trader orders will also be executed more transparently and responsibly, at the same rate as the rate imposed by the liquidity provider (no mark-up).
For traders, the advantage of ECN brokers is the super-thin Floating Spread (from 0 pips or less). However, because they cannot do mark-ups, the ECN broker will take advantage by charging a fairly high commission fee for transactions per lot made by traders.
Better ECN or STP Broker?
From the description above, you can certainly conclude some of the differences between ECN and STP brokers. The differences can be summarized into three:
- STP brokers can apply a commission rate of zero (0) aka free because they can mark up the spread. Consequently, spreads on STP brokers can be higher than on ECN brokers.
- ECN brokers cannot mark up on spreads, so they can apply tight spreads of up to 0 pips. However, the commission fee will definitely be there and the amount is quite large.
- Order execution at the STP broker will be passed to other parties who are not necessarily known by the trader, so the price policy is less transparent. While the transparency of ECN brokers is more guaranteed, especially if the broker can show directly the Depth of Market (DoM) underlying the Bid and Ask execution prices.
Based on these three differences, you might think that ECN brokers are better than STP brokers. However, just being better is not necessarily more profitable.
ECN brokers are actually only profitable if you are an experienced trader who can only use DoM or apply scalping and auto trading techniques. Why is that? Because it’s useless to see DoM if you can’t use it, while the final count of trading fees imposed by ECN brokers can be more expensive than STP brokers. If you like to use News Trading, Day Trading, or Swing Trading techniques, then an STP broker is enough.
ECN brokers also often require a higher initial deposit than STP brokers, with lower leverage. Generally, ECN brokers require a minimum initial deposit of USD200 with a maximum leverage of around 1:200, while STP brokers can set an initial deposit of USD10 with leverage of 1:500 or higher. Therefore, if you are a novice trader, you can start with an STP broker first. After building reliable trading techniques and having more trading experience, then move to an ECN broker.
ECN and STP Brokers Equation
Despite the differences in the description above, ECN and STP brokers are both No-Dealing Desk (NDD) brokers. That is, they are not a bookie broker (with a Dealing Desk/DD) that matches a trader’s order with the broker’s order. By applying the ECN and STP systems, forex brokers provide guarantees to traders that they will not make a profit when the trader suffers a loss. In short, there is no conflict of interest between ECN and STP brokers and traders, so the prevailing prices are more authentic and avoid manipulation.
ECN and STP brokers profit from spreads, commissions, and similar fee components. Profits from these cost components will only increase if the broker can attract a large number of traders who are loyal to them and trade frequently. Therefore, they will try their best to provide the best service possible.
In addition, to increase trader loyalty, ECN and STP brokers often provide bonuses and promotions in the form of:
- Loyalty Program: Points whose number continues to increase if the trader carries out trading activities.
- Daily Signal: Free daily trading signals directly from the broker or in collaboration with market analysts from other companies. Trading signals like this are not guaranteed to be 100% correct, but generally have a standard Win Rate of at least 60% because brokers certainly don’t want traders to turn away because of signals that cause losses.
- Luxury Products Sweepstakes: Instead of cash bonuses, ECN and STP brokers will be more likely to hold sweepstakes with prizes for cars, high-tech gadgets, or luxury vacations. Usually, the rules for the new lottery points will be obtained after the trader has traded a certain number of lots. Thus, traders will be eager to trade more often.
Bonuses and promotions like the three examples are aimed at increasing the broker’s income, but they are also profitable for traders. After all, these bonuses can be obtained at no additional cost. However, traders must be careful not to forget to overtrade just for the sake of getting prizes or to run trading signals carelessly without the proper Risk/Reward ratio.