ECN vs STP Forex Brokers

Traders looking to trade in the forex market encounter various types of brokers when selecting the most suitable one for their needs. Among the most commonly encountered broker types are ECN (Electronic Communication Network) and STP (Straight Through Processing).

Both types of brokers handle trade orders but in different ways. So, the choice between these two types may vary based on the trader’s strategies and expectations.

Let’s take a closer look at both ECN and STP brokers and evaluate their advantages and limitations.

Who Are Forex Brokers? What Do They Do?

Forex brokers are intermediary institutions that make it possible to trade in currency markets. Traders can buy and sell currency pairs and other instruments through platforms owned by brokers.

The primary duty of Forex brokers is to transmit clients' trade orders to the market. These orders are directed to liquidity providers or banks, allowing traders to trade at the best available prices. Brokers earn income from this service, typically by charging spreads, commissions, or both.

Forex brokers offer various trading platforms, analysis tools, and educational materials to simplify the process for individuals. Using these resources, investors can perform market analysis, develop strategies, and manage their positions more effectively.

Each type of broker operates with a different model. For instance, ECN brokers connect traders directly to the market, while STP brokers automatically route orders to liquidity providers. These differences can affect trading costs, speed, and overall trading experience for traders.

What is an ECN Forex Broker?

ECN (Electronic Communication Network) Forex brokers are a type of broker that connects traders directly to liquidity providers, allowing market orders to be processed without the involvement of an intermediary. In this system, traders' orders are sent directly to liquidity providers such as banks, hedge funds, or other large financial institutions.

The primary function of ECN brokers is to enable direct buy and sell transactions between market participants. This restricts the broker's ability to manipulate prices. In actual market conditions, traders are able to view the optimal bid and ask prices and adjust their trades accordingly.

ECN brokers typically offer tight spreads and high execution speed. However, trading with this type of provider often involves commission fees, which are the primary source of their income.

The ECN system is especially suitable for professional traders with large trading volumes or those using scalping strategies. It enables traders to have lower spreads. However, for smaller retail traders, the commission fees and minimum account requirements can sometimes be a disadvantage.

Features of ECN Brokers

• Traders send their orders directly to liquidity providers.
• They usually offer low spread rates.
• Traders can see the real bid and ask prices in the market.
• A specific commission fee is charged per transaction.
• Transactions are executed quickly according to market conditions.
• ECN systems support fast trading strategies, suitable for scalping and algorithmic trading.
• They do not intervene in prices.
• They are directly affected by market volatility.
• Market participants can trade at any time of the day.
• They provide direct connections to banks, hedge funds, and other financial institutions.

What is an STP Forex Broker?

An STP (Straight Through Processing) Forex broker is a type of intermediary that directly passes traders' orders to liquidity providers. They receive prices from banks and other liquidity providers and allow traders to execute their trades based on these prices. In this system, trade orders are processed automatically without any manual intervention.

STP brokers usually offer variable spreads instead of fixed spreads. The spread rates may vary depending on market liquidity and volatility.

They help traders execute their orders faster and closer to real market prices. For this reason, they are preferred by traders who want fast and seamless trading experiences.

Features of STP Brokers

• Trader orders are directly transmitted to liquidity providers.
• Prices are determined by banks and financial institutions.
• Offers variable spread rates.
• Transactions are executed automatically without manual intervention.
• Traders can make buy and sell trades close to market prices.
• High execution speed with minimal delays.
• Spreads can widen or narrow based on market volatility.
• Transactions are processed transparently and quickly within the STP system.
• Typically, no commission fees are charged; profits are made through spreads.
• Suitable for small and medium-sized traders.

Differences Between ECN vs STP Forex Brokers

ECN and STP brokers differ in how they process trade orders, and each type has its own set of advantages and disadvantages.

ECN ones connect traders directly with market participants, such as banks, hedge funds, and other major liquidity providers. In this system, the broker does not interfere with pricing. Traders can view the best bid and ask prices and benefit from tight spreads. However, ECN brokers typically charge a commission per trade.

STP ones, on the other hand, route trade orders to liquidity providers like banks and financial institutions. These brokers offer variable spreads and execute trades automatically without manual intervention. Unlike ECN brokers, STP brokers usually do not charge a commission; instead, they earn through the spread. The spreads can vary depending on market volatility and liquidity.

The following table highlights the key differences between ECN and STP:

Which Broker Type Suits for Your Needs?

When trading in the forex market, determining which type of service provider best suits your needs is important for building a successful trading strategy. Choosing between ECN and STP brokers depends on factors such as your trading strategy, risk tolerance, and approach to trading costs.

If you want direct access to market prices, the ability to see real bid and ask prices, and benefit from tight spreads, ECN brokers may be more suitable for you.

ECN brokers are particularly effective for professional traders with large trading volumes or those planning to use fast trading strategies like scalping or algorithmic trading. However, it is important to note that they charge a commission per trade.

STP brokers are more suitable for small to medium-sized investors. If you prefer a fast and smooth trading process with spreads that are close to market prices, they may be a better option for you.

STP brokers usually do not charge a commission and instead earn through spreads, making them a more cost-effective option for traders with lower trading volumes.

Also your trading strategy—whether it’s short-term or long-term—can also influence your choice of broker. ECN brokers are generally more suitable for short-term and high-frequency trades due to their fast execution speed. On the other hand, STP brokers may be more practical for traders who plan to make fewer trades and focus more on market analysis.

FAQ

Is there a slippage risk with STP brokers?

Yes, slippage risk exists with STP brokers. Slippage can occur during periods of high market volatility or low liquidity. Since STP brokers directly route orders to liquidity providers, they cannot completely eliminate the risk of slippage. Especially during major news announcements, prices can change rapidly, and orders may be executed at a different price than expected.

Why is using an ECN broker advantageous for scalping strategies?

ECN brokers are advantageous for traders using scalping strategies as they offer tight spreads and fast execution speeds. They provide traders with the best available bid and ask prices, making it easier for scalpers to execute their trades.

Are there any platform differences between ECN and STP brokers?

Generally, there are no major differences in the trading platforms offered by ECN and STP brokers. Both types of brokers typically support popular platforms like MetaTrader 5. However, ECN brokers often provide more advanced market depth features. STP brokers, on the other hand, tend to offer simpler user interfaces and focus on fast and automated order execution.