When it comes to trading in the foreign exchange market, you’re going to need a broker to be able to access the market. While there are hundreds of different brokers to choose from, they are not all created equally and they do not all provide the same types of service. Some brokers are considered market makers and simply take the opposite position of you when you place a trade. Another form of broker, known as an STP or straight through processing broker, uses a different model of handling trades. Using this type of broker can provide you with some different advantages and considerations as a trader.
What is an STP Broker?
A straight through processing broker is not quite the same as an ECN broker, although they are often confused with one another. An ECN broker is one that sends your order right through to the market when you place it. With a straight through processing broker, your order may be sent right on to the market and it may not.
If you are a successful trader, the broker may tend to send your order right through to the market when you place it. It then passes on the order to its liquidity provider and makes money on the spread. For example, if the broker gives you a spread of 2 pips, it sends your order to a liquidity provider that gives the broker 1 pip. The broker then keeps the difference and sends your trade on through.
If you are not a very successful trader, the broker may be inclined to keep your orders in house. The broker takes the opposite position of your trade, just like it was a market maker and then makes money when you lose. This means that STP brokers actually use two different methods of filling orders, depending on the situation.
One of the problems that traders often have with STP brokers is that they get a lot of requotes. When they place a trade, they get an error message shortly after that says the trade was not able to be placed because it timed out. The trader may also get an error message saying that the broker was unable to fulfill the order at a specified price and offers another price to the trader. The trader can then choose to accept the new price or cancel the order without losing anything.
Although working with an STP broker can be a little bit confusing, it can also provide you with some advantages. You may be able to get some pretty decent spreads working with this type of broker because they pass along some of their trades right to the market. If you’re a good trader, you don’t have to worry about trading against your broker and the spreads you can get are typically very low. Before you choose a broker, make sure that you understand how the different brokers operate in that you are choosing the right type of model for your trading strategy.