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ECN vs STP: Differences, Pros & Cons, and Which to Choose?

TABLE OF CONTENTS

ECN vs STP: Differences, Pros & Cons, and Which to Choose?

ECN vs STP: Differences, Pros & Cons, and Which to Choose?

Vantage Updated Updated Tue, 2023 June 6 08:13

Your broker is your partner in your trading business. However, selecting a broker is perhaps one of the areas that receive the least amount of attention by new traders.

This article is all about partner selection. We explain how orders are routed through the market, the various types of forex brokers, their advantages and disadvantages, and the key things to look out for in choosing a broker.

Key Points

ECN brokers offer direct order routing to the interbank market with low spreads and a commission fee, ideal for fast execution and scalping, while STP brokers provide variable routing with potential internal absorption of trades.

Both ECN and STP brokers provide non-dealing desk execution with direct market access and low spreads, but differ in execution speed and fee structures.

ECN brokers are transparent with a commission-based cost, suitable for high-speed traders, whereas STP brokers can offer both commission and spread-based costs, with variable and fixed spreads available.

Which One Should You Choose

Forex brokers can offer either dealing desk or non-dealing desk execution models. These execution models determine how the order placed at your terminal becomes live on the market.

With the dealing desk broker, the order is either managed through a “dealing desk”, which is run and managed by your broker. With a Non-dealing desk (ECN and STP) broker, the order is routed directly to the interbank market.

An ECN broker can be ideal if:

  • Your strategy requires the highest speed of execution
  • You want the lowest bid-ask spread and you want the certainty of a flat commission rate
  • You want the flexibility to execute trades both inside and outside normal trading hours, as ECN brokers participate and facilitate in central market exchanges

An STP broker can be ideal if:

  • You would like to have no commission and low spreads on your trades
  • You would like direct access to the interbank market for forex real-time trading

ECN and STP Explained

Electronic Communications Network (ECN) brokers are the forex brokers who only route your orders straight through to the central interbank market and are filled at the best market rate with no dealer intervention. The bank that fills your order has no knowledge of your identity and where your stop order is placed. Hence, ECN brokers only provide routing services for your trades.[1]

Straight Through Processing (STP) is a type of technology used by brokers to electronically pass trades directly to the market. STP brokers pass your orders directly to a counterparty that might be another STP broker, market broker, or even an ECN broker. This means that how one specific order is routed might differ from another. Trades do not pass through a dealing desk – instead, they go directly to the market.[2]

ECN and STP are non-dealing desk brokers — your orders are never routed to the dealing desk as neither ECN nor STP brokers have dealing desks, and this prevents a conflict of interest between you and your broker. Your order is filled entirely electronically at the best market price.

Similarities between ECN and STP Brokers

There are quite a few similarities between ECN and STP brokers: 

ECN BrokersSTP Brokers
Dealing deskNoNo
Low spreadYesYes
Direct access to marketYesYes
Table 1: Similarities between ECN and STP Brokers

Differences between ECN and STP Brokers

A few differences between ECN and STP brokers:

  • ECN brokers are considered to be more transparent
  • ECN brokers only route orders to the interbank market, whereas STP brokers can route orders to any of their liquidity providers such as banks or interbank exchanges
  • ECN brokers always charge a commission on trades, whereas STP brokers can charge commissions and gain from the spreads
  • ECN brokers always offer variable spreads, whereas STP brokers can offer fixed spreads
ECN BrokersSTP Brokers
Order routingOrder is routed straight through to the central interbank market and is filled at the best market rate with no dealer intervention.Order is routed directly to a counterparty that might be the interbank market, another STP broker, market maker, or even an ECN broker. 
Speed of executionAn ECN broker executes trades over the ECN for potential investors, which results in the lowest execution time.The speed of execution depends on the exact route it takes on specific orders.
Fee structureAlways charges a small commission for trades and always has variable spreads.Can charge commissions and also earn from the spreads. STP can offer variable and fixed spreads. 
Table 2: Differences between ECN and STP Brokers

1. Order Routing

ECN brokers only route your orders straight through to the central interbank market. 

STP brokers pass your orders directly to a counterparty that might be another STP broker, market broker, or even an ECN broker. This means that how one specific order is routed might differ from another. However, trades do not pass through a dealing desk.

2. Speed of Execution

An ECN broker executes trades over the ECN for potential investors. Because of the way an ECN operates, dealing with such types of brokers also results in lower costs and more trading time.

Although an STP broker routes an order directly to their liquidity providers, how fast a specific order is executed depends on the exact route it takes.

3. Trading Fee Structure

ECN brokers can only be compensated through a small commission for trades.

STP brokers can charge commissions and also gain from the spreads. STP can offer variable and fixed spreads.

Advantages and Disadvantages of ECN Brokers

Advantages:

  • Trade with low bid-ask spreads directly from the interbank market – no re-quotes or slippage
  • Tightest spreads which can potentially be zero at times
  • The ECN broker will not take a position against you
  • The prices quoted are likely to be more volatile and therefore better for scalping strategies.
  • Direct access to the interbank market for forex real-time trading. [3]

Disadvantages:

  • There is always a commission charged on each trade

Advantages and Disadvantages of STP Brokers

Advantages:

  • Trading with low bid-ask spreads
  • The prices quoted are likely to be more volatile and therefore better for scalping strategies
  • Direct access to the interbank market for forex real-time trading

Disadvantages:

  • STP bridges are commonly used by smaller brokers to connect their traders to large brokers. These larger brokers can choose to either connect the trader directly to the market or decide to absorb the trades internally.
  • A reduced transparency on how the orders are routed

Conclusion

Despite the commission costs, due to its low spreads and ultra-fast execution, ECN has lower costs over the long run. However, STP accounts are also a viable choice given their trading speed and the overall trading environment.

If you are finding it difficult to make the choice between ECN and STP, you can try to trade on a demo account to get familiar with both platforms and decide on a system that suits your trading style. Regardless of your choice, always choose a broker that is regulated, and ensure that the broker of your choice has credibility in the market.

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References

    1. “ECN EXECUTION – Trading with ECN Brokers.” https://ecnexecution.com/. Accessed 8 Apr. 2022.

    1. “Forex For Beginners – RFX Academy.” https://www.rfx.academy/wp-content/uploads/2021/02/Anna-Coulling-Forex-for-Beginners-Anna-Coulling.pdf. Accessed 8 Apr. 2022.

    1. “Forex For Beginners – RFX Academy.” https://www.rfx.academy/wp-content/uploads/2021/02/Anna-Coulling-Forex-for-Beginners-Anna-Coulling.pdf. Accessed 13 Apr. 2022.

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