*OspreyFX would like to state that traders should research extensively before following any information given hereby. Please read our Risk Disclosure for more information.
True ECN Vs STP Brokers: Why Hybrid Triumphs
- What does it mean to be a true ECN broker
- What does it mean to be an STP broker
- Why is a hybrid strategy the best option
The forex industry is the largest global market in operation. With a daily volume of $6 trillion, the foreign exchange is growing fast and more traders join in the action every day. One of the most frequent questions that novice traders ask is; what is the difference between ECN and STP brokers?
Beginners on the hunt for the best broker will most likely look at commissions, spreads, or reputation. In reality, however, their starting point should be to verify the type of business model that a broker utilizes. In other words, does the broker use ECN technology, or does it operate an STP execution model?
Here we aim to help traders understand what it means to be a true ECN or STP broker and why a combination of the two is the best approach.
First things first, what do the letters stand for?
- ECN = Electronic Communications Network
- STP = Straight Through Processing
Now that we have that out of the way, let’s get started.
Subscribe to our newsletter to receive our weekly updates + more straight to your inbox!
True ECN Brokers
A true ECN broker or Non-Desk Dealing (NDD) broker refers to executed trades that go directly to the liquidity provider and traders have access to the real market. Order information is displayed in real-time as fluctuations occur.
With an ECN broker dealing spreads aren’t attached to fixed rates. This means that they can vary in high volatile moments. So, if you are looking to trade small amounts of money, ECN brokers may not be the best choice. They take a commission so when the trader wins, they win. As a result, they are considered the quintessential form of currency traders. Like everything in life, ECN brokers have advantages and disadvantages. The main ones include:
1.Complete Autonomy – Traders can take advantage of neutral prices and actual market conditions. Also, unlike market makers, ECN brokers match your transactions among market players, which means that they cannot negotiate against you.
2. Reliability – There are many reasons why ECN brokers are more reliable, transparent, and honest. As mentioned above, they profit from charging a commission, thus the trader’s success will always be at the forefront. Moreover, they provide direct access to the interbank market by allowing them to discuss the actual market price.
3. Greater access to Liquidity Providers: Traders can engage with an international liquidity pool of renowned financial institutions and market leaders, allowing faster execution of order price.
4. Less interference and elimination of conflicts of interest
1. Variable spreads making it more difficult to calculate stop-loss levels
2. May include high transaction costs. ECN brokers will charge more to open an account in addition to charging decent commissions as this is their principal profit stream.
3. Traders are not able to trade micro-lots and have to trade large volumes of money
OspreyFX’s hybrid approach allows us to counteract these cons. We grant market-leading rates and first-class trading conditions, which supplies our clients with true ECN connectivity. To that end, we have a low commission model of just $5 per lot. Allowing traders to trade micro-lots.
Similar to ECN, STP is a forex broker model that passes traders’ orders directly to a counterparty without passing them through a dealing desk. STP works through a bridge, connecting traders directly with liquidity providers or intrabank. This type of execution can also be used by smaller brokers to connect traders to larger brokers, where they will choose to link clients directly to the market or decide to engage internally.
If a commission-free trade is your priority, STP can be more beneficial than an ECN model. STP execution models are proving to be a hit due to the benefits that traders can enjoy. Nevertheless, there are still a few drawbacks. Let’s have a look at them:
1. Variable and fixed spreads are available
2. Automated order execution process
3. Less risk involved in comparison to other models
4. Faster execution and processing of client orders
1.Not fully devoid of conflict of interest
2. Price is volatile and can change in an instant
ECN vs STP: Which is the better choice?
STP and ECN are NDD brokers. This means that there is no dealing desk manipulation or re-quotes when trades are executing. Although they share similarities, ECN accounts are purely a non-dealing desk model where STP accounts are seen as a hybrid of ECN and market maker models.
A primary difference between the two models is routing. STP trades can be dealt with a variety of liquidity providers, where ECN acts as a form of a hub. ECN brokers are represented by financial institutions or other major market leaders and so acts effectively as the major liquidity source.
Another key difference between the two brokers is that ECN trading is mostly capped at a 0.1 minimum lot size. This is because few liquidity providers allow lots that are less than 0.1. This proves difficult for more experienced traders to trade with smaller amounts of money. So, if you are running on a restricted budget, then STP is your broker of choice. Traders who are more focused on transparency and with a more flexible budget, choose ECN. It’s important to note however that it is more difficult to find a true ECN broker today. Thus, a hybrid model has emerged.
Why a Hybrid Model is Best
The hybrid is a combination of both the ECN and STP, offering the best of both worlds and by-passing market-making. Some brokers give traders the option to choose a certain type of execution for one account and other types for another account. For instance, where you have an account with a substantial sum of money, traders may be offered the opportunity to use an ECN account. On the other side, the ECN choice may not be available if you hold a small amount of money in your account.
Blending ECN and STP involves a low human error rate as it enables a fully electronic forex dealing service. However, it comes with its drawbacks – a hybrid approach can still present system failure errors, programming loss, and security breaches. Nonetheless, by incorporating this type of service, brokers can focus on providing a first-class trading experience. This popular mix also allows the broker to fully automate the order entry, the trade execution aspects, and dealing with spread pricing. Hybrid models are a win-win for traders and brokers alike. It’s not in the best interest of the broker for traders to lose because the longer traders use them, the more they can earn more from a spread or a commission.
Are you planning on starting your trading journey or perhaps you are an experienced trader looking for a new broker? There is no such thing as a one fits all broker. Traders need to keep several factors in mind:
- The amount of money that they are trading
- The type of technology that they can use
- Is their priority low spreads, a high commission, or just the opposite?
If you are into scalping trading and you want to trade micro-lots, then opt for an STP broker. However, an ECN broker is the best choice where you have a considerably high amount of money and want low spreads. Either way, be sure to be vigilant when choosing your broker of choice.
OspreyFX prides itself on being the most trustworthy, quality, and devoted broker through our hybrid execution business model. As a result of our large number of varied liquidity options, OspreyFX has become the broker of choice for many who trade in high volumes, scalpers, and those who simply demand the very best spreads alongside flawless execution.
Best of all, traders can open a free demo account and practice risk-free trading. Trading with a demo account is the perfect way to get started. It enables traders to try and test trading strategies and craft a killer plan based on trial and error. Now, more than ever is the time to earn a passive income. Sign up today.