Monday, October 19, 2015

STP Brokers vs. Market Maker Brokers - Trading Conditions

It is common knowledge that there are different Forex Broker models available in the retail Forex markets. However many clients are unsure about how an STP broker and market making broker differs in terms of trading and the conditions made available to you as a client.

There are many terms that are banded about when it comes to broker types such as DMA trading, ECN Broker and Dealing Desks. Essentially there are two main models that will define how your orders are executed and the conditions that you can trade with. They are STP trading and a Dealing Desk brokers. 

With STP forex trading, you trade with real market conditions, which can range from core spreads, no mark ups on real market swap charges, more responsible leverage and no restrictions on stop los, take profits, and trading strategies.

Spreads can be misleading, especially more recently where more and more market making brokers are offering core spread trading and no ECN commissions payable. These spreads are often sold as a no spread account in order to attract traders with an offer that is too good to be true. The fact of the matter is that the real Forex market charges the broker a spread on EUR/USD that can average at 0.3 pips, and liquidity cost that can be as much as $3-$4 per lot traded. 

If you consider those costs to the broker to trade on a real STP broker account, then how is it that the broker offers trading to retail traders at a loss? How do they make their money? The answer is very simple, they make money on clients losses through their market making strategies. 

A true ECN broker will offer a low "core" spread, and offer these spreads to clients with a commission charge per lot traded. The commissions represents the brokers profitability (less any liquidity costs), and can mean that your broker really does offer STP trading.  

Fixed Spreads
In the real Forex markets (just like any other real market) there is no such thing as "fixed" pricing.  A broker that offers fixed spreads is a dealing desk/market making broker. Fixed spreads is usually attractive for news traders, to ensure that the spread doesn't exceed their fixed spread account. 

However, there are more challenges that will be faced when you look past only the spreads. An STP broker will always affect the spreads feed by leading banks and execution venues directly to traders MT4.

Once again, Swaps (interest) charged is another factor that can define if your broker is a market maker or STP Broker. Swaps charged to clients accounts during rollover can be fully controlled by a market maker and often are marked up to make extra profit from your trading activity.

As STP broker will feed the correct swap charges/credit rates that are a reflection of the professional interbank rates charged by the Forex banks and liquidity providers. 

Position sizes
The options to trade 0.01 sizes on Forex is a regular offering,  even leading banks are now offering smaller order sizes, however, there are no strong liquidity providers that will offer micro trading on FX, commodities and especially Indices. 

Market makers will have traders believe that this is normal and offer it as part of an attractive package to retail traders, however, the conflict is there for all to see.

Most leading liquidity providers offer brokers limited leverage. Especially following recent events where banks have changed interest rates without warning causing high leveraged accounts to reach stop outs very easily.  More recently, the collapse in Chinese stocks has caused extreme volatility. 

Brokers offering leverage of 1:1000 are making markets, the risk level of trading with 1:1000 is uncontrollable from a traders perspective.  A real STP Broker may offer 1:400 or 1:500 leverage to be competitive,  but will always promote the use of a lower leverage to its clients. 

A true STP broker will not restrict or discriminate against trading strategies such as Scalping, News trading or the use of Expert Advisors. In fact, they have no interest if you make 100's or 1000's of profits when trading. The focus of an STP broker, or an ECN broker is increasing your trading volumes, where they will generate more profits through your increased volumes. 

That's why traders can benefit from  unrestricted trading and better, real market conditions with a real STP broker. Most market makers will restrict you by forcing minimum time limits you must keep an order open for, this will dramatically limit your ability to scalp the Forex markets.

Market Execution - Pending and Limit Orders
Restricting your order limits and levels is clever way that a market making broker will generate extra revenues through traders losses. In the real Forex markets, there is no such thing as leaving an order open for a specific minimum time, nor is there a level that the market should move before you can close your order. 

A broker account with inter-bank liquidity gives traders to trade any way they want, without restriction or discrimination through anonymous trading. Trading anonymously means that the bank execution venue has no indication of any strategy, the identity of the trader submitting the order and definitely no information on the SL or TP levels that the client has set the trading account. 

To learn more about the value of STP trading, please feel free to visit our dedicated page that covers many STP trading benefits: