STP/ECN or MM Brokers, How to Recognize

Today we are going to discuss one of the most controversial topics in the world of online trading: STP or Market Maker Broker.

The general Idea in the business is STP is good and Market Maker is bad. Let’s see why, and let’s see why sometimes is not actually like this.

First we should have a look on meaning of both. STP means Straight through Processing, so all orders are sent to the Liquidity Provider without any intervention by the Broker. Here the broker has no conflict of interest with clients and with his LP and the only profit is generated on Spread mark up (if any) and commission mark up.

The ECN (Electronic Comunication Network) Broker is quite similar to STP, they both don’t have any conflict of interest with client, but the main different is that the ECN consolidate price quotations from several market participants. The advatage is that the Broker can usually provide a better spread to their clients.

So how can I understand if a broker is STP/ECN or MM?

  • Spread: Can I undestand from spread or commissions? No I cannot, because there are STP that apply mark up on spread without any commissions but they are really STP and there are bridge that allow them to add mark up without any interference with client trading. And there are MM that put commissions and Raw spread just to look like a STP while they are MM.
  • Leverage: a good indicator is the leverage. If the leverage is too high probably the broker is a MM, usually if the broker takes liquidity from a Prime Broker or from a Prime of Prime the leverage is never over 1:100. So the broker can decide to increase the leverage to retail clients with low balance up to 1:400 to finance the trading, but if the leverage is too high (like 1:500 or 1:1000) propably you are in a MM Broker.
  • Type of Orders: if you have Instant Execution on your MT4 instead than Market Execution most likely you are with a MM Broker. Instant Execution in when your order is executed at the price that you see in that moment (bid/ask) if the price is changed you will have window with a requote asking if you want execute the order with the new price. The real OTC Forex market doesn’t have this type of order, the order is market so is executed at the best price, you could have slippage but not requote.
  • Digits: if you have 4 digits on all currency and 2 digits on JPY currency most likely your are with a MM Broker, the OTC market is with 5 and 3 digits, so if you have 4 and 2 your broker is alterating the price feed that he receive from his LP.
    · Pending orders limit: if your broker has pending orders and SL/TP limit probably is a MM, is an usual policy that MM Brokers use to try to avoid scalping trading or some kind of trading strategy. If your broker is a STP/ECN doesn’t care about your trading strategy (generally) cares about how many commissions you generate.
  • Stop out and margin call: if your stop out or margin call is too close to zero (like 20%) probably you are with a MM Broker, the LP usually set up a Stop out that is never less that 100% .
  • Changing in Trading conditions: if you start to trade with your broker and after a while that you trade and you earn you see some different in spread (became bigger), execution speed (became slower), slippage that in average grow they are all signs that your broker is a MM Broker and is trying to reverse your profit trades in loss trades.

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After all even if the Broker advert that is real STP/ECN and it’s regulated, so the Autority check if it’s really STP/ECN there are ways to hide it. Some brokers open an offshore company that became their Liquidity Provider, so the ‘Regulated Broker’ is real STP/ECN that takes Liquidity from the offshore company that do Market Maker for them. Another way to do it is to declare that they are STP/ECN and agree with the LP to share the losses of the clients.

So the only way to understand if your broker is a real STP/ECN is to try, test it and check constantly the trading conditions don’t change during the trading life. Doesn’t matter how is the execution or how are conditions in demo account, the real account will be different. So try and compare. You will find out.

Daniele Casamassima

Daniele Casamassima
Account Executive
Skype: DanieleCasamassima@TVMarkets