logo
Get Our New E-Books For Free

Liquidity Providers and True ECN/STP Brokers Relationship


Unlike market maker brokerstrue ECN/STP brokers route the traders’ orders to interbanks that are also known as liquidity providersThe Difference of True and False ECN/STP Brokers

So, true ECN/STP brokers are just mediators. They charge a small fee for each transaction. This fee is called commission which is the only legal and legitimate way for these brokers to make money. They don’t make any money from the traders losses, nor they lose any money if traders win.

Liquidity

Liquidity

Nowadays, almost all the true ECN/STP brokers are connected to several strong and famous liquidity providers, whereas in the past they were used to work with only one or a few. These are some of the most famous liquidity providers: Bank of America, Goldman Sachs, JP Morgan, Citi Bank, Nomura, HSBC, Deutsche Bank, Royal Bank, TD Bank, Barclays, Wells Fargo

When a trader clicks on the buy or sell button, the broker chooses one of the liquidity providers that is offering the best price which is the closest to the price that the trader sees on the broker’s platform. Then the broker transfers the order to that liquidity provider. Each of the liquidity providers can offer a price which is usually different from what the traders see on the platform, because the platform’s price can be from only one price resource, not from all the liquidity providers. Therefore, when the order is placed, your entry price will be different from what it was when you clicked on the buy/sell button. This difference can be from a few pips to several pips depend on the market condition. But it is too close to the platform’s price 99% of the time.

The order will be placed when the liquidity provider accepts it. They usually accept the orders most of the time, unless the order is too big and the market is not liquid enough or is too liquid and volatile.

Let’s say your order is placed. The question is whether the liquidity provider knows you as the trader or not. Does it know that which order is placed by which trader?

The answer is, liquidity providers only know the brokers. From their point of view, it is the broker that is placing the orders, not you. They don’t know the retail traders. A broker can have thousands of open positions with each liquidity provider at the same time.

What the difference does this make to you?

The more you know about the brokers and liquidity providers, the easier you can choose a good broker who is honest and doesn’t lie to its clients.

Some brokers say that they don’t allow the liquidity providers to see the stop loss, target and pending orders, because they don’t want them to know the profitable traders and prevent them from making profit. As I mentioned, liquidity providers don’t know the traders. They only know the broker and the positions it takes. As over 95% of the traders always lose, then 95% of the orders that a broker routes to each liquidity provider are losing orders. So there is no point to prevent the winning positions, because the liquidity providers make enough money through the losing positions, and many other things: How Do the Liquidity Providers Make Money?

Also, as brokers scatter the orders among several liquidity providers, then each liquidity provider will have an equal share from the losing and winning orders that each broker sends, and they will not be under the attack of too many winning positions at the same time. This is really good for traders.

Each broker has an account with each liquidity provider, exactly like the account a trader has with the broker. Liquidity providers offer a 100:1 leverage to brokers (of course the famous and strong liquidity providers I listed above, not a small and unknown bank at the middle of Pacific Ocean, or a marker maker retail Forex broker that also offers a liquidity providing service to the other brokers).

Brokers have to deposit enough money to the accounts they have with the liquidity providers. They have to top up their accounts when their clients (traders) lose money, otherwise they can reach the margin call and stop out level. If so, their clients will not be able to place any new orders, and the liquidity provider starts closing the losing positions. This is what a broker never wants to happen, because it will have a very bad impression on the traders minds. They will ask why the negative positions are closed while they still had enough money in their accounts. This is a right question, because the traders had money in their accounts, but it was the broker that didn’t have enough money in the account it has with the liquidity provider. Traders don’t know what is going on behind the scene. They only see the positions that are closed without any reason.

So, the money that a true ECN/STP broker takes from its clients, has to be deposited in the account the broker has with the liquidity providers. Usually they place 50% of the money they take from the clients. As their income, they deduct the commission they make from the orders.

A true ECN/STP broker has to be careful not to overspend the money it takes from the clients, because a too strong market movement can suddenly take the broker account balance down, and so, the broker will have to top up the account immediately before it reaches the stop out and margin call levels. They need money to do that. If they spent the money for the other purposes like office expenses, salaries, advertisement and…, they will get into serious problems.

Sometimes, a too strong market movement causes some positions to have negative balances. It is the broker who has to pay this balance to the liquidity providers, not the traders. But it is the traders who have to pay their negative balance to the broker. However, traders usually walk away and will never pay for the negative balance. The broker will have to prosecute each trader, which will be too expensive. So the broker prefers to shut down and get out of the game. They can get prosecuted by the liquidity providers too. It depends on the contract they have with each other. These are all possibilities. They usually don’t happen even once every 10 years.

Now, I am going to ask you some questions. The best answer will be rewarded with 1000 points. Here is the question:

100:1 is the maximum leverage that liquidity providers offer to the true ECN/STP brokers. What happens if a true ECN/STP broker offers a higher leverage, like 500:1, to its clients? How the orders will be handled then, and who will be the loser or winner if this leverage difference causes any losses or gains?

What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients?

Good luck 🙂



Join Our 20,000+ Loyal Followers Now & Receive Our E-Book For Free!
Download Our E-book For FREE and Don't Miss Our New Articles!
Enter your email address and check your inbox now:

LuckScout
About

"Whether you think you can, or you think you cannot, you are right." - Henry Ford

I want to...

141 thoughts on “Liquidity Providers and True ECN/STP Brokers Relationship
  1. Barbara D. Barbara D. says:

    Very clear information on this important relationship. But Chris what is your question

    • LuckScout LuckScout says:

      Barbara,

      The question was not published for some unknown reasons. But it can be found at the bottom of the article now. Please check.

      • Frank Totti Frank Totti says:

        In regard to the first question the only plausible explanation on how and why at true ECN/STP brokers are able to offer 1:500 is:

        They must have some kind of mechanism or software that can aggregate the micro lots(0.01 lots) of traders and send to the liquidity providers as not less than the minimum lot size of 0.1 lot), on the other hand, the ECN/STP brokers might have extra funds to cover for the extra leverage.

        my answer for the second question on why or what happens if a true ECN/STP broker offers lower leverage like 1:50 is that they reduce the risk of exposure of its clients funds, and they might use the remaining leverage to trade as well with their own funds, thus reducing both their own funds and their client funds to the full risk exposure. It is part of their risk nanagement, just like we do when we have 10 000 USD on our bank account but we deposit only may be 3 000 USD with a broker, and we risk not more than 5% per trade.

  2. Hi Chris!
    1. Nothing happens to open orders if broker offers a higher leverage.
    2. There is a problem if broker offers a lower leverage, all losses close two times earlier.

  3. Merry Burhan Merry Burhan says:

    If the broker is offering higher leverage than what was given to them by liquidity provider, they will go out of business very soon. They will hit margin call first before the retail traders hit theirs. Or if the broker decided to close their clients’ order, They will lose credibility because many retail traders will complain that their order hit margin call before the agreed limit.
    The brokers also lose credibility in fron of liquidity provider, because, they hit the margin call which should not be allowed to happen.
    The loser will be: first retail traders then the brokers.
    The winner: the liquidity provider, they get to eat the 95% losing trade portions.

    If the broker offers 1:50, it is safeguarding itself from any major price movements. Because in event of losing trade, the retail trader will hit margin call first. The limit margin from the liquidity provider is still safe. Business continues for another day.

    PS: if we all were to follow the strict rule of Never risk more than 2pct of capital, literally we should never hit our margin call because we have done duty to limit our losses first before the losses eat us alive. (Unless if we take 50 different trades with 2 pct risk each… LOL!)

  4. If a true ECN/STP broker offers higher leverage of 1:500,either of 2 things will happen;
    1. The broker is acting as both ECN/STP and A maket maker or
    2. He is not a true ECN/STP broker.
    If a true ECN/STP broker offers lower leverage, the clients needs to have a big account to enable him trade effectively.

  5. Aaron D Aaron D says:

    A true ECN/STP broker that offers a higher leverage like 500:1 is not a true ECN/STP broker and will incur any profit or looses on their accounts because their not connected to any provider.
    A true ECN/STP broker that offers a lower leverage like 50:1 to its clients will most likely be a true ECN/STP broker that is connected to several liquidity providers and routes your orders to a liquidity provider.

  6. Dogan Sahin Dogan Sahin says:

    Supplying big leverage effects brokers and liquidity providers accounts very badly. If traders went to margin call and brokers went to margin call as well who will responsible to pay lost money. At the market, real money 1/100 or 1/500 which one is safe for the liquidity providers? Of course for liquidity providers 1/1 is much safer.

  7. Yoeng Jyh Yoeng Jyh says:

    Just my 2 cents.

    A true market marker does not provide leverage more than what the interbanks offer. If they do, they are market markers because interbanks will not accept leverage bigger than 100:1. If a true ECN does really offer 500:1 leverage, traders will lose more money within a short period of time and more faster too. Is it possible brokers match the same lot size of Buy vs the same lot size of Sell for a pair currency and then they will put the extra balance of lot size to interbanks?

    But.. i was thinking that if you are a professional trader, how does it affects you?

    If a true ECN offer lower leverage like 50:1… Actually what is the effect? ECN brokers earn money via commission and spread and also interest rate regardless of leverage…? Same question, how does it affects professional traders?

    Chris?

    Best Regards
    YJ

  8. Hi I will have a go at answering the questions although I have little experience with the way brokers work please correct me if I am wrong.

    If the true ECN/STP broker offers a higher leverage than what his liquidity provider offers him I believe he would put his business at risk. If 95% trades lose and some of these traders walk away and leave negative balances in their accounts the leverage could make the broker have more frequent and larger debts with his liquidity provider and could mean he has to close his business quickly. but at the end of the day the winner or looser will be the trader.

    On the other hand if he offers a lower leverage than what his liquidity provider offers him he would be at less risk of loosing money and his business.

  9. PREM KUMAR PREM KUMAR says:

    Sir,
    If the trader uses the full extent of his leverage, the broker allows trading, because the broker would have deposited huge amount with liquidity provider. Not every trader would be using their leverage to full extent. The ultimate loser will be the trader himself.

    If leverage is 50:1 the broker has additional funds to reallocate to the benefit of the broker.

    These are my simple understanding of the trade.

  10. Jon Njakar Jon Njakar says:

    If a true ECN/STP broker offers a 500:1 leverage and the positions turn out losers then the broker loses as he has to pay out the difference. In case of a lower leverage like 50:1 the broker wins.

  11. Pete Krahn Pete Krahn says:

    If a true ECN/STP broker offers a higher leverage, like 500:1, to its clients, this means the orders will then be processed in the Brokers own offices. When the trade closes out of the money, the Trader will be the loser and the Broker will be the winner. On the other hand, when the trade closes in the money, the Broker will be the Loser and the Trader will be the winner.

    What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients? I am not sure…..

  12. Samer Antary Samer Antary says:

    I think in this case if the trader make profit the broker has to pay the difference from his own pocket

    • LuckScout LuckScout says:

      Samer,

      I rewarded you 100 points because your answer is close. You just didn’t explained it in details and didn’t say under what condition the broker has to pay if the trader makes profit.

  13. Sutiv Serv Sutiv Serv says:

    If a true ECN/STP broker offers a higher leverage like 500:1 to its client, it means that the broker will augment the balance amount for the trade to be routed to the Liquidity provider. E.g E/U @ 1.28576 has margin requirements as follow: 100:1 ($128.57), 500:1 ($25.71), 50:1 ($257.15) for 0.1 lot trade.
    Therefore the broker will provide the balance amount ($102.86)(difference between 100:1 and 500:1 leverage) to enable the trade to be routed to the Liquidity Provider.
    If the trade ends in profit, the broker will gain more but if there is a loss in the trade, the broker will lose more.
    I think the broker will prefer to route trades from profitable traders to the Liquidity provider while trades from losing traders will not be routed to the Liquidity provider. He will like to trade with the losing traders.

  14. Eugene G Eugene G says:

    I guess the answer is:
    If a true ECN/STP broker offers a 50:1 maximum leverage the trader should have a bigger account (twice as big as in the case of a 100:1 leverage) in order to be able to trade the minimum lot.

  15. Hi Chris, The broker finance the 500:1 leveraged trade. Loss or gain for the trader. Good profit but also heavy loss depends on the outcome off the trade.
    50:1 Only levarage will not or can not place at 100:1.

  16. Hi Chris, 500:1 are financed by the broker. Loss or gain for the trader. Dangerous leverage.High risk for the Broker.
    50:1 Will only place 50:1 trade. also broker risk.

  17. Rajesh Sabat Rajesh Sabat says:

    Leverage is a double edged sword. If the leverage is handled with proper risk management then it will be extremely profitable but if it is mishandled then the result will be devastating. If you are getting 500:1 leverage from a broker doesn’t mean you have to trade with that leverage; you have to see what is your risk compared to your overall balance in your account.

    The same is true between broker and liquidity provider. If the liquidity provider is providing 100:1 leverage to the broker and the broker is giving 500:1 leverage to the clients then the broker should calculate the maximum risk if all the clients exercise the maximum leverage, and if the maximum risk is within its balance then the broker should be ok.

    Usually the broker giving 500:1 leverage to the clients while getting 100:1 from the liquidity provider will have serious problem (may lead to bankruptcy) when the once in a lifetime movement happens, such as CHF recently. On the other hand, the broker giving 50:1 leverage to the client will have a lower risk-to-balance, and has a better chance of surviving the once in a lifetime movement.

    In either case, the broker properly not maintaining risk-to-balance will cause serious damage to the clients in outlier movements.

  18. Peter Wagner Peter Wagner says:

    Hi Chris
    Leverage is capital provided (loaned) to the Client (Trader)by the Liquidity Provider. In the case of true ENC/STP Brokers, this ‘loan’ is mirrored from the Liquidity Provider through to their Clients (Traders). It allows a Trader to trade using ‘virtual money’ that is much greater than his real account. The Liquidity Providers can offer this leverage because of their capital backing and financial expertise. In offering this leverage they can attract many smaller clients to trade in a market that normally would require a big capital account.

    1 True ENC/STP Brokers do not offer leverages of 500:1. They offer only a maximum of 100:1 because that is the maximum offered by the Liquidity Providers. Higher leverages like 500:1 are too risky.

    2 Because a True ENC/STP Broker is only a middle man who routes a clients orders directly to the Liquidity Provider,
    . then the ENC/STP Broker does not make or lose money due to the closing result of the trade.
    . It is the Client (the Trader) and the Liquidity Provider who are the responsible parties for the trade results. When one wins, the other takes an equal loss.
    . The true ENC/STP Broker never loses. They receive a commission for each leg of the trade, always, once on the Buy and once on the Sell.
    . Even if the trade is a Break Even trade, the ENC/STP Broker still gets commission for each leg. In the case of a Break Even trade The Liquidity Provider has a zero balance but the Client (Trader) loses by the amount of the commission.

    . However, the Client (Trader) does not interconnect with the Liquidity Provider directly. It is the ENC/STP Broker who is Book Keeper for the balancing of the trade. He deals with the Liquidity Provider on the one side and the Client (Trader) on the other. He collects from one to pay the other. He collects his commission from the Trader.

    If a ENC/STP Broker were to offer a lower leverage such as 50:1, then the responsibilities for a trade, win or loss, remains the same as stated above. However:
    . it is likely that the ENC/STP Broker attracts less clients due to the weaker leverage offer.
    . If a true ENC/STP Broker is offering a leverage less than the Liquidity Provider (like 50:1) then it is possible that the Broker may have problems of credit with the Liquidity Provider.

  19. Abdi M. Abdi M. says:

    Hi Chris

    Thank you for the detailed explanation and the challenging question posed. I have a different question though.

    Some of the liquidity providers you listed have their own forex dealing desks which traders can open account and trade.

    Does this mean that a liquidity provider can act both a broker (in this case true ECN/STP) and a market provider?

    Thanks,

    • LuckScout LuckScout says:

      Hi Abdi,

      That is right. They can act act as broker, and also provide liquidity as a service to the other brokers. They can exchange liquidity between each other too.

      • Jordi George Jordi George says:

        Hi Chris,

        …so, if a liquidity provider can act as a broker, then this is the way to find a true ECN/STP broker!

        However, I am not sure if it is easy to find one liquidity provider/ECN broker interested in having cliets (traders) with litte accounts as €5000 or less!

        What’s your point, Chris?

        • LuckScout LuckScout says:

          Jordi,

          Yes, you can sign up for an account with one of these liquidity providers if you can. However, I prefer to sign up for an account with a true ECN/STP broker that is connected to several liquidity providers at the same time (the way I explained above).

  20. Barbara D. Barbara D. says:

    In answer to your question they can offer a leverage of 100 or less so 50:1 doesn’t stop then being a true ECN as I understand that USA law does not permit more than 50:1 leverage for retail clients v

  21. Peter Wagner Peter Wagner says:

    Hi Chris
    Sorry – I would like my last paragraph under point 2 to have a line added – I left out something:

    However, the Client (Trader) does not interconnect with the Liquidity Provider directly. It is the ENC/STP Broker who is Book Keeper for the balancing of the trade. He deals with the Liquidity Provider on the one side and the Client (Trader) on the other. He collects from one to pay the other. He collects his commission from the Trader. If the Trader blows his account and creates a gigantic loss, then the Broker is responsible to the Liquidity Provider to pay this money and the Broker in turn must chase the Trader to make up the loss.

  22. TJ ' TJ ' says:

    Hi Chris,
    1) No strong liquidity provider involved. The broker take the opposite side of the trade.

    2) The order is not transferred to a strong liquidity provider. As the broker took the opposite side of the trade he will be the winner/loser.

    Thank you!

  23. Marek Herde Marek Herde says:

    answer 1: leverage like 1:100 means, that trader can trade a bigger lot size trade than his physical account holds, which means, that he can potentially earn more risking less as his margin is lower with higher leverage. If He wins, liquidity provider needs to pay more money to the trader through the broker than trader initially put. If now ECN lets trader trades higher leverage than liquidity provider offers, it means broker risks its money adding extra leverage as He needs to deposit His money on the top of 1:100, in case of 1:500, He would have to deposit 400 units of leverage for the client to have a little margin trading bigger size. If client wins, broker needs to pay that extra money as He covered that extra leverage.That’s why ECN broker can become MM and by offering higher leverage will try to make sure, client hit his stop loss so it doesn’t have to pay extra leverage expense to the Liquidity provider.Liquidity provider will earn more at the expense of the broker. If clients loses His money trading bigger lot size, broker will earn more, but pay only amount of 1:100 leverage to the liquidity provider. Liquidity provider still will earn equivalent of 1:100 leverage trade which trader lost, because rest of the money will end up in broker’s pocket.
    2 answer:
    If Broker offers smaller leverage to the retail trader than liquidity provider offers to the broker, it means that margin will be higher to trade lot size than it would be with offered 1:100 leverage. Client needs more money to place bigger size trade and his margin will increase more. Broker risk less and don’t need to cover extra expenses of higher leverage which trader uses to trade. Liquidity provider potentially experience smaller size trades provided by the broker and earn less as clients can’t afford trading higher lot sizes. By trading bigger size with smaller leverage, client risks is the biggest. The smaller leverage, the less risk for the broker.

    I hope it does make sense 🙂

  24. Singh Singh says:

    Answer :

    Higher leverage reduce margin requirements which mean more risk to trader. Broker can protect themselves with margin call but trader will lose eventually.

    Lower leverage are there to abide by the regulations. E.g. in Canada my broker given me 1:33 leverage because of tight margin requirements. Some other broker give bit more (1:40) but nobody can give 1:100 if they go by the rules of the country.

  25. says:

    I believe that when the true ecn-stp broker offer 500:1, they cover 400:1 so they’re kind of market maker and make money in the 400:1 difference when the trader loses.

    And when they offer 50:1 they’re protecting themselves in case of what happened with CHF when most of the trader were negative and they had to cover or shut down.

  26. If I understood your article correctly, and how leverage works, I’d say that a broker offering a leverage of 500:1 must be crazy as the amount of money they would have to deposit at the liquidity providers would be really big. In this scenario I see the liquidity providers as the winners because of the 95% traders losing money, thus “95%” of the brokers deposited money…

    Offering a 50:1 leverage would be safer for the broker, at the same time, meaning less money to make for the liquidity provider, and the broker might not attract as many “losing” traders because of the lower leverage (thus “lower” gain per pips ..)

    Hope my attempts makes sens. Good luck to everyone else

  27. _Ben _ _Ben _ says:

    Anyone over 1:100 leverage is a market maker I believe, and in which case, the broker makes money off of your loss.

    As for below 1:100 leverage, I am not entirely sure.

    This is just what I think, correct me if I’m wrong please.

    Ben

  28. Thanks for the interesting article Chris.

    I actually don’t know the answer to the questions and I’m sure we’ll know in a few days if you write about it 🙂

  29. Hi Chris,

    i) High Leverage
    In my opinion the broker makes money through commissions since higher leverage allows traders to take too big positions. This happens whether the trader makes money or not since they charge commissions irrespective of the outcome of the trade. In case the trader loses then the broker makes money from the loss to the magnitude allowed by the difference in leverage. Since 95% of the traders lose, the broker is sure of making a lot of money this way.

    In cases where the trader makes money the broker loses money to the magnitude allowed by the difference in leverage, which is only 5% compared to the 95% he makes.

    ii) Lower Leverage
    In cases of lower leverage the broker makes less money by way of commissions but may make a lot of money by lumping winning trades and routing them to the broker with more leverage. When the money for winning trades is deposited by the liquidity provider the broker, over and above the commission, shares the profit with the client. This act may not make sense when the percentage of winning trades and losing trades is factored in hence the broker may not want to provide less leverage than what he gets from the liquidity provider.

    Conclusion: It is in the best interests of the broker to provide too high leverage. A true ECN/STP should never provide too much or too low leverage.

  30. If the broker provides 500:1 leverage, they are not a true ECN/STP broker. Any order placed by the trader will be sent off to another market maker and not to a liquidity provider. The trader will be the loser if they accept the high leverage allowed and the market turns against them.

    Nothing happens with a true ECN/STP Broker that offers less leverage such as 50:1 …. I would think that if this happens it is because they are required to only provide 50:1 leverage if they want to service the USA.

    Comment: I hope I am correct in my thinking. Please clarify if I am confused…:)

  31. Dio Stam Dio Stam says:

    Hello Chris,
    Since a broker has a fixed agreement with his liquid provider(s) for a 1:100 leverage, any deviation from that is managed by the broker.
    The leverage a broker offers to his customers has a direct impact on his account. If he offers 1:500 leverage (which means bigger losses/gains) then he will rely on his customers not to lose much, otherwise his account will be bust and he will lose a lot of money because the clients will back off and never come back again. No broker would accept this because 95% of the traders loose. So, 1:500 is a leverage inside their own market where they are not only fully protected, but they also get the money their customers loose.
    Is this right? If this is the case, I have to admit that it is a clever idea (although dishonest).
    Offering 1:50 leverage: I believe it means that the broker is truly connected to real liquidity providers because it shows that he is trying to protect his account.

  32. Otto ☼ Otto ☼ says:

    “What happens if a true ECN/STP broker offers a higher leverage, like 500:1, to its clients?”

    In this case the broker has to have much more deposit (about 5 times) on its account to be able to handle that big positions. In case of a client with 100$ equity the brokes has to have 500$ equity at least on its account to be able to open a 50000$ (500*100$) sized position.

    “How the orders will be handled then, and who will be the loser or winner if this leverage difference causes any losses or gains?”

    I think that everything else works the same way as if max leverage was 100:1.

    “What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients?”

    In this case the broker can have less deposit on its account accordingly.

  33. I will try my best 🙂

    100:1 is the maximum leverage that liquidity providers offer to the true ECN/STP brokers. What happens if a true ECN/STP broker offers a higher leverage, like 500:1, to its clients?
    They are not true ECN/STP broker

    How the orders will be handled then, and who will be the loser or winner if this leverage difference causes any losses or gains?
    The order never reach LP and will be processed in broker pocket, that broker eats P/L.

    What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients?
    They are conservative, they do not want to harm their account in LP. so most probably they are stronger and more sustainable broker.

  34. Linda Martin Linda Martin says:

    Using a ratio of 50:1 as an example, means that it is possible to enter into a trade for up to 50 dollars for every dollar in the account.

  35. Barbara D. Barbara D. says:

    If yes, my addition is:

    A larger leverage is not in the interest of the LPs.

    As a side note the Dodd-Frank Act made it unlawful for brokers to allow US citizens to trade as retail clients with a leverage above 100:1. It does not matter where the brokerage is located only where the retail client is residing.

  36. Bill Jobs Bill Jobs says:

    First, the 500 to one will be offered by a fake ecn/stp.
    Second, I think if such order goes against the broker, they will cancel it and come up with some excuses, if the person is loosing, the broker will wait till they get rich from all the loses and fill up their pockets…

  37. Bill Jobs Bill Jobs says:

    I don’t think a true ECN Broker will offer such a low leverage, because it implies the fact that it’s not back up by big liquidity providers. Or their account is not big enough to accommodate a decent leverage.

  38. Allen Wu Allen Wu says:

    If a true ECN/STP broker offers a higher leverage, like 500:1, to its clients.No doubt clients will be losers if things don’t go well. Usually the brokers will have two systems one is true STP the other is MM system, they can match up their clients orders within their own network without sending orders out to real world or they can open opposite positions against their clients to offset the risk.
    If a true ECN/STP brokers offer lower leverage, to me, it is very responsible right thing to do as not only they try to protect their clients but also to protect brokers themself from abnormal market movements like black swan events

  39. Hi Chris how long do we have to answer?
    And is long detailed answers?

    • LuckScout LuckScout says:

      Hi Nicolaas,

      You still have time. I have not placed any time frame.

      Your answer has to be correct, but doesn’t have to be long detailed. However, feel free to write your answer in any way that you are comfortable with.

  40. Salam dear Chris and thank you for the offer,
    1- leverage, like 500:1 mains that now you are dealing with market maker, the orders will not be routed to the liquidity providers, your order goes no ware but the broker hem salve, by handling it throw a dealing desk.
    now if you lose your broker gain and when you win he lose.

    2- lower leverage, like 50:1 mains you can buy $50 by paying $1.
    where when leverage is 100:1 you can buy $100 by paying $1.
    leverage like having a two side sow, it can help the trader but at the same time a too high leverage can swallow your account in a losing position.

    may he best answer win

  41. Goran . Goran . says:

    Hi Chris,

    My answer on first question is:

    When broker offer leverage higher than 100:1, then he can’t be known as true ECN/STP broker, because orders stay in brokers sistem and they are not provided to LP. This orders is then part of their MM system and usually they work against traders. Even 200:1 is the same case, not to mention 500:1 or higher.

    Answer on second question:

    If brokerage firm offer leverage smaller than 100:1, like 50:1 in your question, then this is also true ECN/STP broker but his capital allocation is different and probably this is part of firms policy to work only with good and profitable traders, because they can earn more money doing that kind of business instead to bother to take money from retail traders, people who usually in journey to financial freedom invest money they can’t afford to lose.

    Sometimes I used to say that HITMAN also has excuses for his action.. It’s just business and he also have to pay bills, mortgage, car loan… Lover’s apartment 🙂

    ..BUT when any broker lower his leverage during the weekend and they also lower Stop Out level because of any other reason, from my point of view they can’t be known as TRUE ECN/STP broker.

  42. M P M P says:

    500:1 : The broker cannot put orders with that leverage thru to liquidity providers as these do not accept that leverage. Therefore the broker act as interim dealer and trader, make a price to his client and thus becomes market maker. He might then make prices in such ways that he makes money rather than loses money most of the times, meaning the retail trader is set to lose.
    50:1 : The broker can put this order 1:1 thru to the liquidity provider. He makes his money with a commission and has no impact on the price. He earns irrespective of his clients’ trading result.

  43. Aariff Kadar Aariff Kadar says:

    If True ECN broker offers 500:1 to its clients, the clients are under risk if the trade is in loss and clients will be profitable if it is in profit.

    if the broker offers 50:1, the trader will be safe when the trade goes against them and viceversa.

  44. 1 – The positions will be multiplied by 5 in the LP side, divided by 5 in the client side.

    2 – The leverage will be respected because 50 is less than 100, so the LP can handle it.

  45. Giorgi Megre Giorgi Megre says:

    Since leverage connected to the margin and considering that 95% loose, higher leverage means clients will loose more money and brokers make more money while leverage for them 100:1.
    If brokers offer less leverage than they have, brokers have to top up their accounts when their clients (traders) lose money, but clients with lower levels of leverage will guarantee a more stable return prospect with manageable loss risks.

  46. John French John French says:

    If broker gets 100/1 from liquidity provider and broker hands out 500/1, broker is responsible for losses.
    at 50/1 when allowed 100/1,broker makes out win or loose.

  47. Jordi George Jordi George says:

    Hello Chris, 🙂

    thank you for this article!

    I think if a true ECN/STP broker offers a higher leverage, like 500:1, to the traders is because the broker also has a market maker service and the orders will be handled through this system. Then, the loser will always be the trader.

    What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients?
    I think it doesn’t happen anything special because the broker is offering less leverage than the maximum allowed (100:1) by the Liquidity Provider.

    Best wishes!

  48. Any D Any D says:

    If a true ECN broker offers a higher leverage to its clients an order can’t be transferred directly to its liquidity providers. The broker has two options: It may use its own money to cover the higher leverage then transfer the order to the liquidity providers or it may close a deal as a market maker broker.

    Best regards,
    Any

  49. Daniel Hoek Daniel Hoek says:

    Nice Article Chris, that clears it up around who leverage affects.

    So to answer your question, if the broker offers a client a 500:1 leverage then when the broker passes a trade through to the liquidity provider the broker will have to put 5x as much margin requirement into their trading account than their client did to ensure the margin is there for the liquidity provider (assuming the liquidity provider have a 100:1 leverage agreement with broker.)

    Using the above example, in percentages that means for a 1 standard lot size (100,000) the broker would have to have a margin requirement of 1% = $1000 while the client would have to have a margin of 0.2% = $200. So the broker would have to front the other $800 to the liquidity provider.

    If the broker offers the client a 50:1 leverage then the opposite happens, the broker only need to put half as much in the liquidity provider account which is safer for the broker but may not allow them to make as much on commissions as a clients maximum position size is reduced.

    I think the leverage the broker offers is based on the risk strategy of the broker and the leverage their liquidity providers are willing to provide them as the higher the leverage a broker can provide, the more opportunity a client has to take bigger lot positions and such bigger commissions but at the risk of not having enough money to support margin requirements for the liquidity provider.

  50. Emil Filip Emil Filip says:

    ECN are placing orders in a true inter bank market, not a separate liquidity pool as market makers do. Their loses can be a lot bigger than market makers and they have to support them all in case of negative balance from traders. High leverage can kill the ECN brokers straight away.

  51. I try my best to answer. But your explanation has open my mind Chris! Thanks a lot

    When a true ECN offers more leverage than the maximum leverage the liquidity providers offer (1: 100), it means they have to deposit more money. And it means more risk on their capitalization (the liquidity on the side of brokers).

    The opposite is when broker only offer lower leverage than 1:100, then they have a less risk.

    And as far as I know some countries have regulations that requires broker to have minimum capitalization requirements. And it means the broker who offers more leverages have more risks to meet this requirement. When there is a strong market market movement, and they have negative balance, then they have to pay more to the liquidity provider and becomming harder to meet the regulations.

    Wowwww it now clear to me! Thanks Chris!

  52. Timo Mahonen Timo Mahonen says:

    Hi Chris, to try to answer the questions as I see it, there would be no difference in your profit with 500:1 leverage. Trading 1 lot you would make exactly the same with 500:1 leverage or 50:1 leverage.

    The only difference is that you would be much more at risk in blowing your account at 500:1, because it allows you to trade higher lots with less money in your account. If the trade goes against you it will give you a margin call quicker than 50:1 leverage. (much quicker!)

    There fore to sum it up, 50:1 would be much safer to trade with than 500:1 leverage, but the profits would be the same for the same amount of lots traded. You just need a larger account size with 50:1 leverage, to trade the same amount of lots as 500:1 leverage.

  53. Fabian T. Fabian T. says:

    Hi Chris thank you for the great article.

    Here is my answer to your question:

    As you said, “Sometimes, a too strong market movement causes some positions to have negative balances”.

    True ECN brokers have to cover their exposition with Liquidity Providers, and therefore they need to maintain lower leverage for their customers.

    If they offered 500:1 leverage, then they would have to maintain 10 times bigger deposit with their Liquidity Providers than their clients, compared to if they were offering 50:1.

    If they offered 50:1 leverage, the client would have to maintain 10 times bigger deposit with the ECN broker, and consequently ECN brokers could maintain 10 times smaller deposit with their Liquidity Providers, compared to if the ECN broker were offering 500:1.

    So, in case of a negative balance:

    If offering 500:1, the loser would be the ECN broker.

    If offering 50:1, the loser would be the client.

  54. Sean T Sean T says:

    I’m thinking that the broker who offers 500:1 is taking a higher risk and has higher exposure to said large events.
    50:1 broker is conservative and less likely to run out of money!

  55. Shalewa A Shalewa A says:

    1) How the orders will be handled?

    A true ECN/STP broker cannot offer a leverage higher than 100:1, because the liquidity providers do not support a leverage higher than this.

    Losses – The ECN/STP broker has to pay the losses.

    Gains – The ECN/STP broker has to pay the trader the gains.

    Therefore, such a broker is likely to be a market maker not a true ECN/STP broker as the ECN/STP broker only makes money from the commission.

    (2) What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients?

    Answer – An ECN/STP broker will NEVER offer a lower leverage. The broker in question is a marker maker broker and such a broker would keep the money in his own account instead of giving it to the liquidity providers.

    References
    https://www.luckscout.com/6-ways-forex-brokers-cheat-you/
    https://www.luckscout.com/electronic-communication-network-or-ecn-brokers/

  56. Leverage is the multiplication of your balance. This allows a trader to open bigger trading positions since the margin required will be lowered according to the leverage one have chosen. Even though with leverage you can make a bigger profit, there is also a risk of having a bigger loss because the positions you open will be of higher volume (lot size).

    Example:
    Your trading capital is10.000EUR
    The leverage chosen is 100:1
    For a STANDARD trading account this means 100*10.000 = 1.000.000EUR
    On EURUSD long position opening at 1.3055, position closing at 1.3155
    The difference is 0.0100 pips thus 1.000.000*0.0100 = 10.000 USD this is the profit you made

    Now to the first question, if a broker offers 500:1 leverage instead of standard 100:1, the client will loss much more and if the leverage cause any losses and on the contrary, if the leverage causes some gains, it is to the client’s advantage.

    The second question,” What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients?”
    The lose will be minimal if the client’s trade goes otherwise and so it’s trading account is a little bit protected from margin call.

    The client account is somehow protected and also the TRUE ECN/STP broker has some money in its portfolio

  57. Carl V Carl V says:

    If a true ECN/STP broker offers a higher leverage, like 500:1, to its clients, the broker will have to deposit larger amounts of money into it’s account to cover any major losses by it’s clients. Otherwise, they can reach the margin call and stop out level.

  58. Carl V Carl V says:

    As for big losses, the broker has to pay the balance to the liquidity providers (not the traders). The traders may have to pay their negative balance to the broker, but usually not, because the broker would have to go after every trader. That would be too expensive. The broker is better off shutting down.

  59. Carl V Carl V says:

    If a true ECN/STP broker offers a lower leverage, like 50:1, to its clients, they would not have to deposit as much in their accounts or risk a margin call with the liquidity providers as much. Also, the clients aren’t risking as much with a lower leverage. But, potential gains are lower as well.

  60. Valdas Ly Valdas Ly says:

    Hi Chris,
    I will try to answer .
    A first question .Here will be no ECN/STP broker, but MM broker. High leverage increase of the probability of loss and margin call and specially novice traders will loose account.
    A second question. This kind of broker set the extra forced slippage in their platform, which prevents the traders from opening and closing their position when they want. Slippage steals profit of the winning position. Also market marker increase stop loss when the current price is close to the stop loss level. And sometimes MM disconnect platform and traders lose profit.
    A third question. Not sure here will be ECN/STP broker. But leverage 50;1 , for clients means,they can buy or sell with less power. This leverage applies to American.

  61. Rom Elis Rom Elis says:

    If so called True ECN/STP offers higher leverage than 100:1 they automaticly become MM, because they can get leverage 100:1 or less from liquidity provider. They will need to cover losses in case of winning trades by traders. And they will get the profit from loosing trades. So, they will be interested in loosing trades. Thats what MM do.

    In case of lower leverage than 100:1, they still be a true ECN/STP broker, because they can route these orders to liquidity providers as it is. So their profit still gonna be commision per trade.

  62. Rado Z. Rado Z. says:

    Hi Chris,
    I want to answer your question.
    I think, that if a true ECN/STP broker offers a higher leverage to its clients (e.g. 500:1) than liquidity providers offers to the broker, I think it’s worse for the broker and it is playing against the broker. Because with the leverage 500:1, me as a client need just $200 margin to open 1 lot ($100.000) position with my broker. Whereas, my broker needs $1000 margin to open the same position with it’s liquidity provider. So the broker needs 5-times more margin on liquidity provider’s account, as his clients need to open the same amounts of the positions at their broker’s accounts.
    In opposite case, if my ECN/STP broker offers me a lower leverage, like 50:1, it’s better for the broker. Because I need $2000 margin to open 1 lot position, but he needs just $1000 to open the same position at liquidity provider’s account.
    I think that’s why the true ECN/STP brokers does not allow a leverage higher than 100:1. You Chris, mentioned it at your articles, as one of the signs of the true ECN/STP brokers. Maybe, they can offer just a lower leverage than 100:1.

  63. Vindy R Vindy R says:

    I’m a beginner yet I’ll try to answer these questions so that may be at least Chris or any experienced user can point out if I have gotten it all wrong or just right.

    “Assuming we buy $ by paying $ for the ease of calculations. When it’s 500:1, the trader actually needs $2000 to buy 10 lots of USD which is $ 1,000,000. But the (true ENC/STP)broker has to deposit the actual amount of money (or half of it if leverage is 2:1 or so) in their account with the liquidity provider. If the market goes against the trade, the traders account could go negative. But as we know traders never pay the negative amounts. The broker lose all the money he actually deposited to buy the position for the trader. He could go bankrupt easily if this occurs with few traders with huge leverage.
    If the trader wins with a 500:1 leverage, of course he will have huge gains. The broker does not get affected and he gets the commission.
    If the Leverage is 50:1, it’s less risky for the broker in the case of a losing trader. If it’s a winning trade then the broker will still get the commission.

  64. 1. Leverage 500:1 (more than 100:1) is not allowed by liquidity profiders, So the traders’ order will not route to interbanks. Its means that in this case, The ECN/STP broker acts like a market maker broker. They make money through the clients losses and get losses when the clients make profit.

    2.Lower leverage is allowed by liquidity profiders. So there will be no problems with the traders’ order.

  65. Linx Susanto Linx Susanto says:

    Hi Chris,

    The more higher the leverage that the broker gave to their clients, the more risk for them.
    So that is not a good ECN/STP broker.

    And also if the broker offer a very low leverage, that’s mean they will take the risk by putting their money in to the trade that their client made.
    I think is good if the broker offer normal leverage like between 100:1 to 200:1.

    Thank’s Chris, for everything you’ve done for us. ☺

  66. Thanks Chris,

    If a true ECN/STP offer 500:1 leverage to its clients, means higher leverage is a double edged sword and most of the time there is a higher rate of losses in these markets i.e over 95% that is where I think a true ECN/STP broker will be getting his money. It is also an enticement to attract more retail clients since it helps control a big portfolio with a relatively small capital.

  67. order will be handled separately, i.e. 1:500.
    1:100 goes to liquidity providers.
    1:400 goes to broker. broker would take the profit / loss for this portion

  68. says:

    Hi Chirs,
    I am writing this with what i have understood.

    1. When the true ECN/STP broker offers a higher leverage like 500:1, clients tend to take more positions with the same amount of money than they would with 100:1. I think the handling of the orders will be the same.

    Winner:
    i. the broker earns more commission due to higher volumes.

    ii. traders who took the correct positions.

    Loser:
    i. the LP loses because the broker risks more money and in case of a sudden market movement the broker might just walk away.

    ii. traders who took the incorrect positions.

    2. When the broker offers 50:1 leverage, clients can take positions only upto that limit. Hence the broker earns a lesser commission and profit or loss for traders is also limited. Since loss is limited, traders benefit.

    The 1000 points reward is a good thing Chris. That motivates us to understand this properly which i think is the most important thing.

    Thank you,

    Thiru.

  69. IGOR J. IGOR J. says:

    Hi,

    you wrote once in one of your article, as far as I remember, that true ecn/stp broker offers max leverage 100:1.
    If they are offering more (or less), and saying that they are true ecn/stp broker, then they are lying.

    BTW you are doing a great work: I´m a novice, reading all the time you article, learning a lot because I want to become a Profitable Forex Trader.

    All the best, Igor

  70. HI Chris,
    Below is my guess:
    If the broker is true ECN broker. Their only income source will be the commission from each trade. If they offer higher leverage (Example 500:1) towards their clients compare to leverage from liquid provider (100:1), they need to have bigger account with the liquid provider because the trade margin for 100:1 is higher compare to 500:1. This will put their business into higher risk since they cannot manipulate the spread if the trade go against their favor. And if they manipulate the spread, then they are no longer true ECN broker.

    Now, how about offering lower leverage? If true ECN broker offer lower leverage (50:1) compare to liquid provider, then it will show their they are offering package is not competitive compare to other true ECN brokers. Hence, it is also bad for their business. And also, what is the purpose they provide lower leverage at the first place? If they use the surplus money for other activities. Then it might be hidden risk for the client as they do not how is their extra fund been handled.

  71. Score Mmo Score Mmo says:

    Hi Chris,
    if a true ECN/STP broker offers a higher leverage, like 500:1, to its clients that’s mean, that the difference from 100:1 (in this case 400:1) will be covered by broker itself. In such cases I would say that such broker is also a Market Maker.

    I would say that with the levrage like 50:1 a true ECN/STP broker would have lower “risik” with profitibile traders.

  72. Qwer SkyKii Qwer SkyKii says:

    Hii Chris, if ECN broker offer 500:1 leverage,then its NOT ECN broker,it is MARKET MAKER which they over leverage account to easily wipe out accounts of novice traders,who dont know much about forex.
    LOSER WILL BE TRADER WHO USE 500:1 LEVERAGE,WINNER WILL BE BROKER MARKET MAKER WHO OfFER 500:1 LEVERAGE.

    If ECN Broker offer 50:1 leverage,its ok.but i think traders with this leverage will have smaller gains in trading
    But best leverage to use is 100:1.

  73. Hi Chris,
    I’m Not great with these kind of topics but anyways,
    I think if they offer 500:1 They are taking more risk which means they’ll be acting like risky brokers and we could end up loosing.
    If they offer lower ratio then that equals less risk for us but maybe less profit? I’m really only stabbing at this but not so sure at all. Thanks ,Enio

  74. says:

    From my understanding what happens is dependent on the type of client account, micro account or standard account. Let’s assume the accounts are all standard. What happens is this; when the client is losing beyond his capital, his broker is losing (500:1 means for every one dollar the client is given five hundred dollars to trade with). This means that the broker will lose more money when compared to the liquidity provider that gave the broker leverage of 100:1. When he is gaining, his broker is gaining nothing only commission; likewise the liquidity provider.

  75. says:

    In the first scenario, (500:1) the broker will need to back up their account with the liquidity provider to avoid positions being closed early. Although I suspect the easier option will be for those brokers to trade against the trader by acting as money makers. The broker and trader both lose. The trader Will lose because a trade that may reverse may be triggered early.
    The broker gains bad reputation and may also lose money
    In scenario 2 the trader may not be able to trade high volumes and maximise profits from strong trades but it saves him the problem of F margin calls and trading too lots. The broker needs lower deposit with the liquidity provider.

  76. Jauhar Ali Jauhar Ali says:

    I think if a broker gives 1:500 leverage, he is taking higher risk on trader positions. Traders can now open bigger positions and if the broker is MM, he will have more gains and traders will have more losses assuming that the majority of traders are losers. However, if the broker only deposit traders’ money with Liquidity Providers (i.e., no extra money), the total positions of all traders with the broker may easily exceed the margin limit that the LP is giving to the broker, and this will result in a margin-call for the broker and in turn for all the traders.

    If the broker has to maintain some minimum balance with the LP (say $100 million) and the total deposits of all traders is less than that (say $50 million), then giving higher leverage to traders is good for the broker, as their balance will be used more in trading.

    If a broker is offering 1:50 leverage, he is reducing his risk. If the traders are opening big positions, still the broker will have room for big moves in the market and can avoid margin-call.

    So an MM broker may take the risk because of potential gains (loss of traders) but an ECN broker may not take that risk as it will be a risk for no benefit.

  77. James NM James NM says:

    hi chris
    my answer is if liquidity provider offers only 100:1 leverage then the true ecn/stp will not be able to route orders with 500:1 leverage to liquidity provider for he has no the other 400:1 leverage

  78. Simon Chee Simon Chee says:

    A true ECN/STP will not offered leverage more than 100:1, if so, simply he is not a true ECN/STP broker. Most probably he is a market maker. It will be in a losing end for traders like us, because when you gain, they will make you loss, when you loss, they are more than happy.

  79. My understanding goes like this.

    1. Make sure that the account is ECN/STP account. I.e. the broker makes money by commission and not by spreads.

    2. upon confirming that the broker is a true ECN/STP and one still notices that the broker offers leverage of any dimension (i.e anything from 1:1 to 100:1 or anything more, just make sure that they have negative account protection guarantee.

    Would like to hear the comments from fellow traders as well.

    -Raja

  80. Yoeng Jyh Yoeng Jyh says:

    Hi Chris,

    I remember back I have a chat with a mm broker before. They told me that they will match all the buy and sell positions first, the balance of extra position will send to ECN. And if the balance of extra positions that sent to ECN are losing trades for traders which is a profit for ECN, the mm broker will get commission from ECN.

    It that possible?

    Best regards,
    YJ

    • LuckScout LuckScout says:

      Yoeng,

      They take [mirror] positions with banks or liquidity providers when a trader takes a big and too profitable position. This is what the dealing desk has to do to recover the loss.

      • Yoeng Jyh Yoeng Jyh says:

        They take the opposite position with banks when a trader has a too profitable position? I didn’t get it.

        Since they are MM, i thought they should follow the profitable trader direction in order for MM to recover to loss?

        • LuckScout LuckScout says:

          Yoeng,

          Sorry, I mean “mirror” position.

          • Maria S Maria S says:

            Hi Chris,

            If this is the case, wouldn’t it be an advantage for MM if a good trader trades with them? They can see the profitable trader’s positions and copy them (mirror positions) to make more profit. Why would they also try to make traders lose? Thank you

          • LuckScout LuckScout says:

            Maria,

            I don’t think that is a good solution. They only take a mirror position for some of the positions that are too big and look too profitable. They don’t do it for all positions. Besides, the other tricks will still be used to make the traders lose.

  81. Ghazi Ali Ghazi Ali says:

    my opinion is same as otto.

  82. 1. It is impossible for TRUE ECN broker to offer 500:1 leverage.

    2. 50:1 is to protect themselves and their clients.

  83. Frank Totti Frank Totti says:

    My apologies if I am answering this question for the second time. If I understood well, the questions is not about what is a true ECN/STP broker, we all know what is a true ECN/STP broker, because Chris has explained it in his articles, the questions is related to the fact that true ECN/STP brokers get only maximum leverage of 1:100 from their liquidity providers, and that the liquidity providers don’t deal or take lots lower than 0.1, but we see many of them(true ECN/STP brokers) offering more than what they get from the liquidity providers (1:500 leverage and 0.01 lots), which is typical characteristic of a market maker broker, but it doesn’t necessarily mean that a broker that claims to be ECN/STP broker cannot offer such higher leverage and micro lot sizes, many of them they do, therefore, the question is how do they(the true ECN/STP brokers) handle it, and who loses/wins because of such extra leverage if something goes wrong?

    Most of the true ECN/brokers that engage in such practice, manage this by offering higher leverage only to low-volume traders or traders that have deposits that cannot handle 1:100 leverage, and they aggregate the low-volume trader’s micro lots orders and send it to their liquidity providers. Some ECN/STP brokers adjust the leverage to 1:100 as soon as a trader reaches a balance account that handles the normal leverage.

    (see for instance http://www.agmmarkets.com/trading_accounts/account_comparisons.php). See also http://www.pipindex.com/speed-of-execution.html)

    Traders remain the loser/winners under normal circumstances, and brokers lose only under extraordinary circumstances, and they win most of the time.

    For those brokers that offer lower leverage like 1:50, the least that can happen is that this reduces the trader’s buying power, thus less capital risk exposure, no matter the reasons of doing so( whether legal or pure risk management).

    • Linz H Linz H says:

      Hi Frank “AGM Markets has the right to temporarily freeze trading activity without prior notice.” This statement is a reference to bank rollover times, but being a separate paragraph that’s not absolutely clear.

      • Frank Totti Frank Totti says:

        Thanks Linz H, I am not sure whether the brokers I have mentioned are true ECN/STP brokers, nevertheless, they claim to be ECN/STP brokers,however,they fail to comply with the requirements of a true ECN/STP broker as we have learnt here in LuckScout, because they offer mini lots and leverage above 100:1. Anyway, the question that Chris asked was how do a true ECN/STP broker that offers 500:1 leverage handles their clients meanwhile they are only entitled to 100:1 leverage from the liquidy provider, and what happen or who loses and who wins…etc,. So when I researched about this, I found this 3 brokers who gave some kind of explanation on how they handle their clients by offering leverage higher than 100:1 while maintaining their claim of being an ECN/STP broker. So by providing their links, I did not mean to introduce them as true ECN/STP brokers, nor I want to lead anybody to believe they are, it is just that they were one of the few brokers which explained how they handle mini lots and higher leverage in the ECN/STP fashion. Anyway, Chris has already provided the correct answer, but your comments have reinforced my suspicious of their claims of being ECN/STP brokers. Thank you Linz H

  84. Bob McCain Bob McCain says:

    If the ECN/STP broker offers its clients a higher leverage than what they are offered by their liquidity provider, it will mean that any market movement will have a greater effect on the client’s balance with the broker than it has on the broker’s account with the liquidity provider by the same proportion as leverage difference.
    So in the case of the broker offering 500:1 and the liquidity provider offering the broker 100:1, when a client opens a new trade they will have to risk 5 times the amount of capital to the broker than the broker will have to provide to the liquidity provider.

    Because 95% of the traders lose, it would mean that the ECN/STP broker would effectively make a lot more profit overall if they offered 500:1 leverage, as the client would lose 5 times the money per losing trade than the broker loses. So in the even of a client wiping out a $1000 account, it would only cost the broker $200 – therefore an $800 gain for the broker.
    So the risk with a ECN/STP broker offering higher leverage than 100:1 is that they will gain from making their clients lose and therefore may be tempted to interfere with trades to increase the likelihood of this.
    The gains they would would make from this would likely far exceed the commission they win on the client’s winning trades.
    Effectively they will win to some degree whether the client’s trades win or lose.

    If the broker offered 50:1 and they were getting 100:1 from their liquidity providers, then the broker would only make money when the client has a winning trade. Therefore if they did offer anybody 50:1, it would be only to the most successful traders (I don’t know of any reason why the trader would accept this if they are successful).

    Not sure if what i have written in this dissertation is correct or not, but that is how i understand it! 🙂

    • Bob McCain Bob McCain says:

      Just a correction on my comment “Effectively they will win to some degree whether the client’s trades win or lose.”

      This is not quite correct, because in the event of the client winning a trade, yes the broker will get some commission, but their losses through the leverage difference are likely to far outweigh that.

  85. Eka Praganta Eka Praganta says:

    Hi Chris

    My answer is :

    Trader side : No any impact for the trader as long as the trader always follow the ” 2% Risk Rule “.

    Broker side : No idea.

  86. Clinton H Clinton H says:

    If a true ECN/STP broker offers a higher leverage, like 500:1 for its clients it will require that broker to put up more money to back it then what the client is using by up to 5 times. It will also more then likely cause more of the brokers clients to lose their accounts and possibly go negative and try to leave the brokerage with a loss as your article described.

    Honestly both sides really lose. The brokerage has to take on extra risks and I’d be surprised if the extra clientele from the high leverage would really balance that out since they aren’t making money off the losing trades, but just quantity. It could be viewed as the trader winning, but if you are trading with good management a high leverage like that just entices newer traders to lose their money quicker.

    If a true ECN/STP broker offers a lower leverage, like 50:1, for its clients then it allows the brokerage to be able to have less money it has to keep in it’s account with the liquidity provider(s). This allows more freedom for the brokerage to use the extra money in other endeavors whether that is better customer service, advertising for new clients, etc.

  87. Nadi Brh Nadi Brh says:

    As Chris said liquidity provider doesn’t know the traders. Hence, changing (increasing/decreasing) the leverage by the broker will mainly affect the broker deposit.
    Since when the broker gives a higher leverage to the traders, the broker needs to have much bigger deposit in the liquidity provider as the insurance for much larger positions the traders might make.
    But, it doesn’t mean the broker will be in a losing position, as the leverage is mostly applied in the wrong way, the higher deposit by the broker will be compensated in the long run by the losing positions of those traders who uses the higher leverage.
    And when the broker lower the leverage, the initial deposit requirement won’t be needed and the risk of using leverage by the traders will decrease and the broker won’t have more profit through higher commission when using high leverage like 500:1

    And one thing, Chris please clarify this 1000 points and what should we do to not be deleted from the program you are going to launch, I have limited time to study the articles and I’m worried about my points as my activity is not that much. I either must read the article or try to find something valuable to post in the forums

    thanks

  88. 1. don’t know
    2.don’t know
    we don’t know what happends behind the scene so any broker can do whatever he want’s theres an exception if we know them personaly

  89. Urip Cahyono Urip Cahyono says:

    1. What happens if a true ECN/STP broker offers a higher leverage, like 500:1, to its clients?

    Basically , the client ammount of margin will be reduced 0.2 times from the original margin (if the clients have the position at that momment)

    2. What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients.

    The clients ammount of margin will be increased 2 times
    from the original margin.

    3.How the orders will be handled then?
    It is handled by a sister company which is MM Broker.
    Who will be the loser or winner if these happens?
    The clients who have negatif position will be the loser as soon as the Broker lower the leverage to 50:1.

  90. Ivo R Ivo R says:

    I don’t know the answer.

    95% of all traders loose, maybe 99% loose. If a liquidity provider accepts 100:1 leverage and the broker 500:1 leverage won’t the broker have less funds since the traders blowed up they’r accounts faster and payed less comissions ?

    So a too strong market movement will take the account ballance of the the broker down faster than they can replace the liquidity provider ballance ?

    50:1 would seem safer, the brokers would trade longuer and more profitably maybe, even the bad ones. 500:1 seems a bit unbalanced compared to liquidity 100:1. maybe. not shure.

  91. Kahsay Kahsay says:

    I would’t agree more than ANY D what he said.
    depending on your article chris a true ECN/STP never offer a leverage higher than 100:1 if so they are market makers.

    most of the time even a true ECN/STP brokers I don’t think so they can offer lower leverage like 50:1 because they know it will be the benefit of the trader and they will not make that much money .
    thanks chris

  92. Linz H Linz H says:

    If a true ECN/STP broker offered more leverage than the LP’s then they must have a separate MM account. ECN account brokers don’t care if you win or lose because they only gain commissions and interest and simply act as a conduit between the trader and the LP’s.Therefore it’s in their interest for traders to succeed and place more orders.

    High leverage belongs to MM’s who operate their own liquidity pool which is not real money. The real money is the trader’s accounts of whom 95%+ lose to the broker. A MM broker has many legitimate and illegitimate tools to work with according to their honesty to protect themselves from too much loss such as hedging/ mirror trading to the manipulation of spread and traders accounts either manually or with software. Also if they are combination of ECN and MM they can move successful traders over to ECN if they are too successful with less risk to the brokerage.

    ECN brokers who offer 50:1 means much less sensitivity to price movements and therefore less risk for the trader and thus him surviving being of benefit to the broker and will comply with US law if in the USA.

    500:1 leverage (the highest is 3000:1) are MM accounts and cannot be STP but provide smaller deposit requirements for bigger leverage to entice the smaller trader but at much more risk to the trader and less to the broker.

    Thank you for your time.

  93. My answer to your question is that if the ECN/STP broker is offering a higher leverage to its traders of 500:1 while the the liquidity provider gives a leverage of 100:1, then the ECN/STP broker must have a portfolio of more losing traders losing money with the liquidity provider(s), rather than winning traders gaining money with the liquidity provider(s). This is so that the ECN/STP broker more often collects extra money due to leverage from the losing traders rather than paying out to the winning traders. Paying out to the winning traders is very expensive when the leverage is 500:1, so ECN/STP brokers would only do that if they know they have a substantially larger percentage of losing traders. Likewise, if the ECN/STP broker offers a lower leverage of 50:1, then the ECN/STP broker actually retains part of the 100:1 margin it realizes on the winning trader’s trades, because it only pays out 50:1 but it made 100:1 on the trades. Plus it also collects aditional monies due to the leverage from the losing traders on their losing trades, although not as much additional monies as if the leverage was higher. So the ECN/STP broker will have made not only the commission, but also will retain the the leveraged gain that it did not pass on to the winning traders. Offering a lower leverage than what the ECN/STP broker is paid by the liquidity providers means that the ECN/STP broker has positioned itself very well to not lose money. Now, Chris, please tell me if I am right. I did not read the comments of the others or any of your responses before submitting this comment.

  94. L Seru L Seru says:

    Just a guess
    50:1 leverage is an enticement to overtrade
    If u want to trade to trade a 100:1 leverage you have to place a 50:1 trade twice therefore paying twice the spread or commission. It is a false sense of caring for you but a subtle ploy to rip you off.

  95. Jason T Jason T says:

    If I am going long GBP/USD and want to gain £1 per point for each 0.0001 increase and I was going to use my cash only, entering at 1.5250, exiting at £1.5300, I would

    1. buy GBP 15,300.00 with USD 23,332.50
    2. sell GBP 15,250.00 for USD 23,332.50

    Using this example , breaking out the questions above :

    100:1 is the maximum leverage that liquidity providers offer to the true ECN/STP brokers.
    – So this would mean ECN/STP needs to deposit GBP 153.00 only.

    What happens if a true ECN/STP broker offers a higher leverage, like 500:1, to its clients?
    – Client needs to deposit £30.60 only to get same exposure

    How the orders will be handled then, and who will be the loser or winner if this leverage difference causes any losses or gains?

    – For a gain position ECN/STP will not need to deposit anything extra with liquidity provider. Trader will not need to deposit anything extra with the ECN/STP.

    – For a loss position – say rate has gone down to 1.5200 and position is £50 in loss, ECN/STP would have to have GBP 183.60 in account to keep trade from being stopped out, ECN/STP would require to trader to have GBP 80.60 in account to keep trade from being stopped out. So – at all times the ECN/STP is placing GBP 122.40 more with the liquidity provider than the trader is placing with ECN/STP – in effect “lending” the cash to the trader.

    So – if all positions are out of the money then the trader wins as he is getting cheap leverage. If some positions are winning then net margin required would be less, reducing burden on ECN/STP. If 95% of trades are loss making then ECN/STP would always be providing cheap funding so giving high leverage to customer does not make sense and is dangerous for the trader as ECN/STP is in danger or not having enough money to cover losses, pay out wins to winning traders or use excess traders cash in their possession to cover these margins.

    What happens if a true ECN/STP broker offers a lower leverage, like 50:1, to its clients?

    In this case ECN/STP always has more cash than required by liquidity provider. ECN/STP would require GBP 306.00 from trader to take this position. ECN/STP can cover positions safely and make interest / pass on interest to customer with excess cash.

    Not 100% sure about this but seems to make sense to me. Non-genuine ECN/STP happy to give high leverage because they don’t want to hedge out all of the customer positions and quite happy to take the other side
    and win from expected 95% of losing trades.

  96. Vic Vic says:

    Ok, this is my bet:

    Leverage is a service offered by the broker that allows the trader to borrow borker’s money so that bigger positions can be taken. The operation’s loss or profit is deducted from or added to the trader’s account, the broker does not lose nor earns money from the operation.

    Thus, offering leverages higher than 100:1 can be attractive to retail traders that are willing to invest small quantities. Although true ECN/STP brokers do not usually offer more than 100:1 leverage, it seems possible to me that a true ECN/STP broker could offer a 500:1 leverage, even when the liquidity provider maximum leverage is 100:1, by using its own money to cover the 400:1 the LP does not offer. The broker would need to add extra money to its account with the LP to cover the margin needed for its traders’ bigger positions. Of course, these positions are leveraged but the derived losses or gains are deducted from or added to the traders’ accounts and the higher leverage implies no extra risk for the broker.

    Such a business model could be interesting for the broker to attract smaller accounts and charge higher comissions, since these are usually calculated over the full negotiated volume.

    About the second question, I do not see any problem in the ECN broker offering leverages lower than 100:1, as this is just the maximum leverage offered by the LP, so lower leverages are always allowed. If the broker plans to offer 50:1 leverage to its traders, it only needs to set its account with the LP accordingly.

  97. Thank you very much. Now I understand better how brokers work. In some of your comments, you said bank accounts don’t offer leverage, but in one of your other article, you said liquidity provider (which are banks) offer a maximum leverage of 1:100. They just offer it to brokers, or a private trader can have a bank account with a 1:100 leverage? Professional traders (the ones earning millions) trade with regular ECN broker or with bank accounts? Thanks for educating us.

    • LuckScout LuckScout says:

      You are welcome.

      They offer this leverage to brokers, not to retail traders. Most of them, or I’d better to say all of them, don’t offer any leverage if you open an account with them directly, unless they also manage a brokering system on their own, which is what some of them are doing.

  98. Bin Gar Bin Gar says:

    Hi Chris,

    1) It would be easy to answer like many of the comments above and say ‘it is not a true ECN/STP’ if it is offering 500:1 leverage.

    But your questions asks about a ‘TRUE ECN/STP BROKER’.

    TRUE ECN/STP simply routes orders (as you stated). Therefore to achieve 500:1 leverage it must split the order and send to enough liquidity providers to achieve this 500:1, assuming they all provide 100:1, then 5 providers would be necessary to achieve this leverage.

    Any gain/loss on the trade would then be borne by the trader, as per normal.

    2) Offering a lower leverage of 50:1 to clients simply protects the clients from adverse volatile market movements, which at the end of the day is in everybody’s interests.

    • LuckScout LuckScout says:

      Brad,

      1) How is that possible technically? I am interested to know how it is possible to split the leverage among different liquidity providers. It is the first time I am hearing this.

      2) For those who don’t know how to trade and use the leverage, even a 1:1 leverage is too much and they will wipe out their accounts finally.

      Please kindly give me the answer of the first question. Thank you.

      • Linz H Linz H says:

        I’m sure I heard that they bundle orders together with the same LP to achieve the requirement but I’m not sure how that is possible…Maybe we need a MM broker to explain that

  99. Chris, I still don’t get the difference between retail and istitutional brokers? Are ECN brokers istitutional brokers, or the banks are the only type of platforms that can be called “istitutional”? Thanks.

  100. Forexbuddy Forexbuddy says:

    What is it the factor determining the price of a currency? When you trade from a bank account, is the price the result of the people and brokers that trade with the bank, or does it also depend on the things like tourism and other financial investments? We can know how to read a chart properly and take the right position, but still don’t have any idea about forex works. Thanks for your educational help.

    • LuckScout LuckScout says:

      On any market the price is determined by supply and demand. The more tendency to buy, the higher the price goes, and visa versa.

  101. Hi Chris, can you explain me what a top of book is? Is it the liquidity of a broker, the maximum aumount of the lots it can take? Is it true that most liquidity providers can’t take more than 20-30 lots?

    • LuckScout LuckScout says:

      The most important thing is the ability of opening and closing the positions at any time. This is what the traders need more.

      True liquidity providers have no problem even with bigger than 100 lots positions.

  102. Thanks, Chris. But what is exactly the top of the book? Is the liquidity of a broker based on its liquidity providers? Can a broker with a top of the book of 5-10 lots be considered a true ECN? Or true ECN must have higher top of the book rates?

    • LuckScout LuckScout says:

      A true ECN/STP broker just routes the orders into the LPs. It doesn’t have any liquidity if its own. So the liquidity it can provide depends on the LPs it supports.

      Strong LPs can easily support much more than 5-10 lots. I don’t think that a 5-10 lots limits makes sense for a true ECN/STP broker.

  103. Thanks Chris. I don’t understand this fact that liquidity providers have all different prices. It shouldn’t be there an universal price made by the main participants of the market?

    Or maybe it’s because the prices change continually, based on the orders liquidity providers receive. I’m asking because you said, many professional use MT4 for analyze the charts, and others platform to take position. But if the prices are all different, is the analysis valid?

    There are pips differences, but the direction of the market that we see on the MT4 official platform is equal to the other chart like EBS or currenex, cause it is based on the biggest liquidity providers moviments? Please, tell me if I’m wrong.

    • LuckScout LuckScout says:

      You are welcome.

      Few pips price difference doesn’t make any problems specially when you follow the long time frames.

      Forex market is a global market, but it is not united. Each bank can offer its own price for each currency. It is not like the stock market that each stock has a special price. If the prices are close to each other on Forex market, it is because of the competition. If a bank offers a bad price, nobody buys from it. So its price has to be competitive.

  104. Iva Hampl Iva Hampl says:

    Ok let it try

    Leverage has nothing to do with MM or True ECN it is about making money and contract between broker and client.
    We know 95% of us loose, higher leverage more chance

    leverage 500:1 non experience traders
    LP 100:1 so 400:1 in 95% goes to broker, on only 5% broker has to pay to trader
    Leverage 50:1 experience or more sensible traders
    LP 100:1 – win trade 50% goes to broker
    Lost trade 50% broker has to pay to LP

  105. Dear Chris,

    Thank you for all those articles, As a novice I am following your 5 steps course, thank you so much for that.
    I have a question about brokers. In this article (and many others) you wrote about true ECN/STP brokers. When I am searching on the internet for a broker, then I see also 100% DMA/STP brokers. Please can you tell me, are these good brokers too? Or are they just marketmakers?

    With regards,

    (Sorry for my English, my Dutch is better ;-).

    • LuckScout LuckScout says:

      Anneke,

      You are welcome.

      Even market maker brokers are good if they don’t try to make you lose:
      https://www.luckscout.com/market-maker-brokers/

      But unfortunately many of them try to make the traders lose, because the traders loss is their profit.

      Even true ECN/STP brokers can cheat the traders through imposing markups. Therefore, when a broker is true ECN/STP, it doesn’t mean that it is perfect and it doesn’t cheat.

  106. Dogan Sahin Dogan Sahin says:

    Higher leverage means that with small amount of deposit traders can take big positions. When the things get worst for too many clients, broker stopped out by liquidity providers. But for market maker nothing happens at this situation. Market makers put clients money to their pocket. So we know that real broker doesn’t take this risk.


Download Our E-Book For Free!