Forex Trading through Real ECN/STP Brokers
Trading through ECN/STP brokers is the best option retail traders have. So far, we have published several articles about market maker and ECN/STP brokers, the differences they have and the reasons it is better to sign up for a live account with a true ECN/STP broker. You can refer to the Forex Brokers Category and read those articles.
As per Youness recommendation, in this article, I talking about the things you have to know about Forex trading through ECN/STP brokers:
Just occurred to me that you might consider writing an article about the disadvantages of ECN/STP brokers, so LuckScout members have a balanced view of what really they’re getting into if they choose ECN/STP broker.
Many of the traders don’t know that There is no guarantee of stop loss execution and if their trading balance goes into negative, they’ll be chased by their broker…etc.
I know this can be true with market makers too, but it’s less likely, while direct exposure to liquidity providers requires good trading experience and awareness of greater risks.
Thank you Youness!
Youness is right. Trading through an ECN/STP broker is not like demo trading. It is trading with the real world wide currency market. I am going to explain about the facts that you will be faced with when trading through ECN/STP brokers. Please note that by “ECN/STP broker” I mean “True ECN/STP broker”, not the false and fake ones: The Difference of True and False ECN/STP Brokers
ECN/STP brokers route the traders orders to interbanks, also known as liquidity providers. So, ECN/STP brokers are nothing but mediators. They charge a small fee for each transaction. This small fee is the only legal and legitimate source of income that ECN/STP brokers have.
Unlike ECN/STP brokers, market maker brokers don’t route or transfer the traders orders to any third party. Trading with a market maker broker is exactly like demo trading, but trading through ECN/STP brokers is completely different.
Under the Market Normal Condition
1. Entry Price:
An ECN/STP broker transfers your order to a liquidity provider when you click on the buy or sell button. That liquidity provider accepts and executes your order at its own price, not necessarily the price you had on the platform when you clicked on the buy/sell buttons.
That liquidity provider price is usually different from your platform price, for two reasons: 1) They are connected to different price resources. Although prices are usually so close to each other, still there is a difference. Under the normal market condition, this difference is not more than a few pips usually. 2) Although the process of transferring your orders to liquidity providers is done automatically and electronically, it still takes some time to be done. Prices change all the time, and so, the price can be different by the time the liquidity provider receives your order.
This entry price difference is something completely normal when you trade with the real currency market through an ECN/STP broker. Novice traders who don’t have any live trading experience, complain about this price difference, and sometimes they go ahead of themselves and file negative reviews on different sites.
Live and real trading through a true ECN/STP broker, is different from demo trading. You have to send a request, and your requests has to be received, approved and executed. You cannot expect this to be done with your requested price. This is impossible.
This entry price difference is still much better than the difference you will experience when trading through some market maker brokers. Although they don’t route your orders anywhere, and all orders stay on the their servers, exactly like demo trading, some of them slip the price to make you enter the market with a price which is a few pips against your requested price (for example, you click on the buy button when the buy price is 1.1176, but your position will be taken at 1.1179 which is 3 pips higher. Even if you win in this position, that 3 pips plus the spread and swap will go directly to the broker’s pocket).
However, the price difference you will experience with an ECN/STP broker is not always against you. It is sometimes in your favor and sometimes against you, because it is based on the normal price differences, not intentional manipulations.
2. Exit Price:
It is almost the same with the exit price when you click on the close button. Your exit price will be different from the price you see on the platform when you click on the close button. This difference is normal with ECN/STP brokers. It is not always against you. Sometimes it is in your favor. However, market maker brokers who slip the price when you want to get in, also slip the price when you want to get out. This slippage is always against you.
When you set a stop loss and target order for a position, then, under the normal condition and in most cases the positions will be closed with the price which is too close to the stop loss or target order prices, unless the market is too volatile because of the news release (I will talk about this condition later).
Some ECN/STP brokers don’t let the liquidity providers know the stop loss and target orders. They have it at their own side, and when the price reaches the stop loss or target level, they send a closing request to the liquidity provider. In this case, the close price difference can be larger compared to the case that the stop loss and target orders are placed with the position that the liquidity provider is handling. The reason is the market volatility and the time that it takes to send the closing request to the liquidity provider, and the time the liquidity provider needs to receive and execute the request.
3. Pending Orders:
Like stop loss and target orders, some brokers place the pending orders with the liquidity providers, and some brokers hold the orders on their own servers. When the price reaches the pending orders value, they send the request to the liquidity providers. For the reasons I already explained above, with the first method, the entry price will be closer to the pending order value, but with the second method the difference will be larger. In both cases, it cannot be exactly the same, like what you see with a demo account under the market’s normal condition.
This difference is absolutely normal and is not more than 1-2 pips under the market’s normal condition. Again, the good thing is that when you trade through an ECN/STP broker, the entry price difference is not always against you.
Many market maker brokers slip the price when you want to enter the market through a pending order. This slippage is always against you. If you complain, they will answer that it is impossible to enter the market exactly with the desired price in live and real trading, whereas this is a joke, because there is no real market when you trade through a market maker broker. It is just the broker at the other side of the line.
4. Negative Balance:
Sometimes when the price moves very fast and the market becomes too validate, and at the same time the liquidity providers get bombarded with too many orders, it becomes impossible to execute the stop loss and target orders. It also becomes impossible to close the positions of the accounts that reach the margin call and stop out levels. The broker sends the request to the liquidity provider, but they cannot process it. It is the same when the order is already placed with the liquidity provider.
Therefore, some accounts that have no enough money to handle the negative positions, will have a negative balance when the liquidity provider succeeds to close the positions finally. The broker will not receive any warning from the liquidity provider if it still has enough money in the account it has with the liquidity provider (read this). However, sometimes even the broker account reaches the stop out level and even gets a negative balance.
In both cases, the liquidity providers knows the broker as the responsible. It is the broker who has to pay the negative balance. But it is the trader who has to pay for his account’s negative balance to the broker. It is real trading after all, and each side is responsible for his own actions. You trade and you are responsible for the money you lose.
If the broker cannot pay for the losses, it can be prosecuted by the liquidity provider. And, it is the broker’s right to prosecute the client for the negative balance. The broker has to pay it to the liquidity provider, and you have to pay the broker.
Negative balance also occurs when you trade with market maker brokers. But to them, the negative balance is just a negative number. It doesn’t mean any money, and it has no value. Exactly like in demo accounts that $1,000,000 and $1 are the same and they both have no value. In spite of this, market maker brokers play a game and warn the traders to pay the negative balance, but when they see it can cause the traders to walk away and stop trading, they “generously” forgive the clients and recover the negative balances, to make the clients top up their accounts and keep on trading with them.
Some of them claim that they have something called “negative balance protection”. This has become more common since the 15th January CHF Tsunami. They claim that their “negative balance protection” works like an insurance for the traders. Whereas this is all nothing, but a dirty trick to attract the traders who don’t know what is behind the scene. People think that they are protected and nobody will prosecute them if something like 15th January CHF Tsunami happens again. So they sign up for a live account with that broker with peace of mind. The market maker broker attracts more money, whereas it is the ECN/STP broker who is the real participant of the Forex market. ECN/STP brokers cannot offer any “negative balance protection”, because it doesn’t make sense to do that.
Now the question is whether you will get into trouble because of a negative balance if you trade through an ECN/STP broker?
First of all, events like the 15th January CHF Tsunami are not going to happen even once every 10 or 20 years. It is possible that we never experience such an event again.
Second, although you will be responsible for your account negative balance, and the broker has the right to prosecute you because of it, I have never heard that they do this with the retail traders. They have to prosecute each trader who has a negative balance, take him to court and prove that he has to pay for it. It will be too hard and expensive for the broker. Even if they can do that and get the court order to take the money from the clients, they will not be able to do it, because in most cases it is somehow impossible. They have to hire a collection company to do it for them. This will cost more money for them. Besides, the collection companies don’t have enough authority to take the money from traders.
So, brokers prefer to take no action. Some of them will have to get out of this business because of the money they have lost. Many others will come to an agreement with the liquidity providers who also have lost money, but still need the brokers to make money: How Do the Liquidity Providers Make Money?
So there is nothing to be worried about.
In spite of this risk, professional traders still prefer to trade with ECN/STP, not market maker brokers, because ECN/STP brokers never cause them to lose money, but market maker brokers do. A market maker broker can never tolerate a consistently profitable trader. They want the losing traders only.
Under the Market Too Volatile Condition
What I explained above about the entry and exit prices and the differences you will experience, is true even under the market’s normal condition. However, sometimes markets become too volatile because of a big transaction or an important news release. It is when it becomes harder for the liquidity providers to execute the orders.
When you place a pending order and the price starts moving toward a special direction very strongly, reaches and goes beyond your order level very fast, then the liquidity provider cannot execute your order at the level it was set to. However, your orders will have to stay on a line, waiting for execution. Under such a condition, at any price that your order becomes executed, your entry will be the price which is in liquidity provider’s favor, not you.
For example, you set a buy pending order at 1.1187 while the price is below this level (buy stop order). Then the liquidity provider executes your order at 1.1500 which is about 325 pips above your pending order value, then your position entry will be 1.1500, not 1.1187.
Now, let’s say the price reaches 1.1187, but the liquidity provider cannot execute it there. However, instead of going up the price goes down after that while your order is on the line, waiting to be executed. Finally the liquidity provider executes your order when the price is at 1.1087 which is 100 pips better for you (it is 100 pips below your buy stop order level). In spite of this, your entry price will be considered at 1.1187 which is where you had set your buy pending order, not at 1.1087 which is the price the market had when your order was triggered.
It is the same with the stop loss and target orders.
There is the same problem when you click on the buy/sell buttons while the markets are too volatile and the price is moving too fast. However, in this case you usually get “off-quote” error and you will not enter the market. You will get this error even with a demo account when the price is moving too fast.
The above events occur on the shorter time frames and for those who trade them using pending orders.
The solution is that you don’t set any pending orders and you don’t enter the markets when a strong news is about to be released. You wait for the strong time frames to form strong trade setups, and you enter the markets when they are calm and quiet.
When you take the too strong time frames signals, then they are usually agreeable to the direction that the strong news move the price. So, you will be at the safe side most of the time, and the strong price movements caused by the strong news, will make money for you.
The way that liquidity providers behave under the markets too volatile conditions may not look fair to you, but market maker brokers will be even more brutal to traders when the market condition is not normal. You can easily make money consistently with ECN/STP brokers without having to be worried about any of the problems I explained above, whereas a market maker broker doesn’t let you make profit consistently. When they see they cannot stop you from making money, they will email you that they are not able to offer their services to you anymore, and so, you must withdraw your capital and close your account.
Good luck 🙂