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There is a lot of chatter in the tradesphere about STP/ECN brokers and the advantages and disadvantages of using them and if they really make that much difference to traders.
So, let’s take a look…
What does STP stand for?
STP stands for Straight Through Processing
What does ECN Stand for?
ECN stands for Electronic Communications Network
What does that mean?
Well basically it means that when you execute a CFD trade your order goes direct into the market. If you’re buying your broker is connecting you directly with a seller though an exchange.
Does ECN/STP matter?
Well yes in some circumstances and no in others.
It matters is you need lightening fast execution and are working decent trade sizes. However, if you’re working really big orders the underlying market may not be liquid enough to fill the order so in really big order cases you may be better utilising a brokers internal liquidity to get filled.
It also depending on how you want to pay your broker. If you want an all in price (i.e. no commission) then you can’t have direct market access. Because then your broker wouldn’t make any money. If you want clean prices and are happy for an additional commission charge to be added to the trade then you can get DMA. The advantage of STP/ECN for clean prices is that you get much better pricing because you can work orders inside the bid and offer.
However, most DMA brokers will have a minimum commission for traders so if you are a small trader, it won’t be cost effective.
Can ECN/STP help you make more money?
It certainly can’t help you put on more winning trades. But what it can do if help increase profits and reduce losses by minimising your execution costs. Costs can be improved by transaction speed and execution pricing.
How do ECN/STP brokers make money?
Unlike brokers who offer commissions built into the spread ECN and STP brokers make money by charging commission per lot, or per 1m or per share (depending on what you trade). You do need to factor this in when calculating your gross P&L versus your net P&L.
Where can you find an STP/ECN CFD broker.
You can compare DMA (direct market access) brokers here. But for the majority of private traders one of the major CFD brokers should be perfectly adequate.
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Plus one other thing to consider is that DMA brokers often cater to professional traders so unless your account size is above £50k you won’t be able to open an account.
If you’re a hedge fund looking for a prime broker for DMA, you can use our prime broker finder tool here.
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously acting as multi asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2000.