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
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.
Swaps
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.
Leverage:
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.
Scalping:
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: http://www.yadix.com/about-us/stp-forex-model/
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