ECN and ECN/STP Forex Brokers 2019

Traditionally the Forex market was off-limits to retail traders, due to the institutional nature of the participants. Major banks and hedge funds made up the vast majority of the market, and their activities were only partly speculative, but the big money domination of this business has changed over the last decade or two.

ECN/STP Broker Advantages

There are a few varieties of DMA brokerages, which use different systems to interact with liquidity providers. The oldest model for an NDD brokerage uses Straight Through Processing (STP) to match their client’s orders with market liquidity and makes their money by charging a commission for their services.

An ECN/STP broker offers traders direct market access, with the best liquidity that can be found through a network of liquidity providers. These brokers often have numerous liquidity providers available to them meaning that extremely competitive pricing can be found.

A more recent innovation in the world of Forex trading is the Electronic Communication Network (ECN), which can match up a client’s order with other small client’s orders, as well as tapping larger liquidity providers.

ECN/STP Brokers vs. Dealing Desks

In contrast to ECN/STP brokers, a Dealing Desk (DD) Forex broker has an inherent conflict of interest with their clients making the potential for abuse is always present. This is a direct result of their business model, which enables them to trade against their clients’ positions, stop client’s trades before they are executed, and profit from client losses.

Historically, the DD business model was known as a ‘bucket shop’. They were notorious for giving traders poor prices, and not letting a profitable position pay at the rate that it should. It really is more of a casino than a broker, though some DD Forex brokerages may not be involved in this sort of shady dealing.

Regardless of if they are using their system to take a client’s money, a DD brokerage isn’t a desirable choice for an experienced Forex trader. Even if they are honest, you will basically be limited to trading with one counterparty who is always trading against you and not on the open market.

Trading on the Interbank Market

Unlike a DD Forex brokerage, a DMA broker uses a market-based system to allow traders to access the same counterparties that major financial institutions use for Forex trading.

This means that when you want to trade, you will be given access to some of the deepest pockets in the world. Instead of dealing with whatever prices your market maker broker decides to give you, you will be given the ability to trade directly with buy and sell orders from money centre banks and hedge funds.

Occasionally, DMA brokers also let their clients see the market’s order flow, which gives them the ability to use advanced trading strategies.

Is STP or ECN/STP Better?

The differences between an STP and ECN broker to a retail trader aren’t as meaningful as the difference between ECN or STP brokers and Market Maker brokers.

In most cases choosing a hybrid broker is the best way to go, as they will give you the most options. There are a few things about using a DMA broker as they differ from how a DD broker operates.

Most importantly, because your DMA broker isn’t controlling the ‘market’ in the same way that a DD broker does, the market can move quickly, and liquidity may not always be available at the levels you need. This is called slippage, which traders don’t get at a DD because it is the broker that is making the market and giving the trader liquidity instantly by taking the other side of the trade.

This means that the market can move past your stop loss orders, and your losses can far exceed what you expect.

DMA brokers also tend to have larger deposit requirements than DD brokers, and for clients that have less to deposit, a DMA broker might be out of reach.

This is something of a warning to smaller traders. If you only have a little bit of money, and you want to trade highly leveraged Forex positions, you may not be making sound financial decisions. Your risk of loss is very high, and there are other options out there.