Straight Through Processing brokers, also known as STP brokers, are brokers who will pass on the orders directly to their liquidity provider upon receipt of a clients order and prices are executed at the bid/ask rates of said providers. Liquidity providers can vary between banks, hedge funds, investment corporations and other brokers, and so there are no intermediaries involved in the order. This basically means that an STP broker does not filter orders through a dealing desk and that is what makes the brokers electronic trading platform STP.
Without the use of a dealing desk, an STP broker has the ability to process their clients orders without any delays and they also wouldn’t have to send re-quotes to clients. In turn, the STP broker can allow clients to trade during the release times of financial news with no restrictions, something that most investors usually consider as a major advantage. In other words, STP means that a broker plays the role of a silent connection provider between markets and the trader.
An STP broker is able to benefit from having multiple liquidity providers as more providers in the system means that there are greater fills for the client. Majority of STP brokers usually use banks as their liquidity providers. As a trader, it is best to select a broker with the most variable spreads. This is because they would be able to select the best bid from one of the liquidity providers from their own and the best ask spread from another liquidity provider, which equals to the best possible options for clients.
An ECN broker uses Electronic Communications Networks to allow clients access to other participants in equity and currency markets. An ECN broker combines quotes from multiple market participants, and therefore offers clients a tighter bid/ask spread than what would be available to them. The main differences between an STP and an ECN broker is routing. ECN’s act as a hub of major liquidity sources, usually represented by banks, liquidity providers, hedge funds and other major market players.
All these sources become intertwined in order to be able to find counterparties for orders that cannot be handled internally. Advantages of an ECN broker are they make for lower total trading costs for traders, which equals to higher net profits and lower net losses.
Dealing Desk Brokers
Dealing desk brokers, also sometimes referred to as market makers, create a market for their clients, or in other words, take the other side of a clients trade. This allows dealing desk brokers to make profit through spreads and providing liquidity to their clients. Dealing desk brokers are indifferent to the decisions of an individual trader as they supply a sell and buy quote and consequently fill both orders for their clients.
Although dealing desk brokers are controlling the prices at which orders are filled, it also means that there is a very small chance of them setting fixed spreads. While clients don’t get to see the real interbank market rates, they are still offered rates that are very close to, if not, similar to interbank rates as competition between brokers is very stiff.
An A-Book broker follows a model that passes your orders directly to a liquidity pool, which is made up of different organisations that act as an equivalent to the trades flowing from a forex broker. A-Book brokers do not act as a clients counterparty, and therefore do not have a conflict of interest when processing a clients orders.
A-Book brokers make profit by charging a commission on trades, which is the fee paid by the client when they open or close a position. A-Book brokers include STP and ECN brokers.
B-Book brokers are those who process clients’ trades inhouse and act as a counterparty to their trades. Simply put, if you place a buy order with a B-Book broker, they will be selling to you and vice versa. A typical benefit of B-Book brokers include guaranteed fills on your trades. Meaning that even if liquidity is low, you still receive good execution of orders as the broker acts as a market maker.
Another typical factor includes B-Book brokers offering improved spreads, which means that even if a client trades during peak market hours or during off-market hours, B-Book brokers still workout to be more beneficial. B-Book brokers make profit through charging clients a spread as well as commissions which is paid every time a position is opened or closed. B-Book brokers include a similar model as Dealing Desk Brokers.