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The Difference Between STP and ECN

金汇
金汇
05-15

What is STP? What is ECN? How do market makers operate? You can find the answers here.

I. What is STP

STP, short for Straight Through Processing, refers to a direct processing system where an STP account, also known as a direct-through account, sends customer orders directly to the banks for execution at prices close to the customer's requested price. As banks are the dominant players in the Forex market, executing trades through an STP model can ensure that customer orders genuinely enter the international market instead of being countertraded by brokers. In an STP model, Forex brokers do not participate in trading with clients but act as promoters to banks, thus reducing the risk of brokers absconding or defrauding customers. Brokers under the STP model typically profit from a relatively fixed spread.

①Advantages of the STP Model

The greatest advantage of the STP trading model is the execution of real transactions in the market without broker intervention. Investors can trade freely without the numerous restrictions typical of other models. In the STP Forex model, the market is in a leading position. All quotes come from the international Forex market, ensuring fairness for customers engaging in Forex trading.

②Disadvantages of the STP Model

Nothing is perfect, and the STP model also has its shortcomings. Banks execute trades in real-time at prices close to the customer's, which can result in significant rate fluctuations during volatile market periods. At such times, orders may hang unfinished, indicating they have been processed but remain pending in the system, waiting for the bank to execute at an appropriate price. During frequent market fluctuations, processing a large volume of orders can be slow.

II. What is ECN?

ECN stands for Electronic Communications Network, an electronic trading network that employs a centralized-decentralized market structure for Forex trading technology. This model operates by collaborating closely with banks, institutions, Forex markets, and technology providers. Traders' orders are hung directly and anonymously on this network, where every order has equal status, ensuring fair and optimized execution based on price and time.

①Advantages of ECN

The primary advantage of ECN is fairness. In financial trading markets—a marketplace of reciprocal transactions (buy and sell)—fair trade and equivalent exchange prevail. However, in MM platforms, due to the partial liquidity provided by the platform itself acting as both referee and player, there is a significant incentive to create conditions unfavorable to retail traders for their profit-making, such as earning more by slipping an additional point. True ECN platforms reduce unfair conditions by simply transmitting customer orders, earning commission fees, and allowing client orders to trade with other counterparts in a unified trade pool, thereby ensuring fairness and reasonableness.

②Disadvantages of ECN:

Despite the clear advantages of ECN, not everyone uses this model because it has entry barriers. Entry into the trading pool of exchanges like Chicago requires a minimum of 2.5 standard lots. In reality, large trading pools such as CME and CURRENX have entry barriers that are not easily met.

Differences between STP and ECN Accounts

【1】ECN involves matching trades, while STP is a direct processing system. Briefly, an ECN account facilitates transactions between investors matching buy and sell orders, whereas an STP account involves brokers forwarding orders to banks to provide liquidity.

【2】Trading costs for STP accounts are spreads, while for ECN accounts, they are commissions.

【3】In the Forex field, the entry threshold for STP accounts is generally lower than that for ECN accounts.

Apart from STP and ECN accounts, another account type is the market maker account, generally provided by brokers to supply liquidity themselves. Orders do not go directly to the Forex market for execution. The market maker mode's platform will hedge inverse positions with investors, meaning the investors' profits are the market maker's losses and vice versa. It is advisable to opt for regulated platforms where investments are fairly entered into the market.

Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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