Since online trading is introduced to the public, traders learn more and more every day. Few years ago, most traders would have no answer if you asked what ECN/STP was. Thanks to the Internet and the free information accessible to public through it, now most traders know how to choose a good broker and what a market maker and ECN/STP brokerage system is.
However, scams never stop cheating. Since most traders look for ECN/STP brokers to open an account with, many scam brokerages that were used to be market maker, call themselves ECN/STP now, just based on some small changes they have made in their systems. They are not true ECN/STP brokers. This is what you have to be aware of. So, what is the difference of a true and a false ECN/STP broker?
ECN stands for Electronic Communications Network. An ECN broker is the one that its platform is electronically connected to the network of international banks or liquidity providers. When you trade through such a platform, indeed you are communicating and trading with the real and true international currency market.
STP stands for Straight Through Processing. It means everything from placing the orders to closing them is done automatically and electrically without any manual intervention.
Does it mean that if a brokers electronically and without any human intervention connects the platform you install on your computer to another organization called liquidity provider, it is an ECN/STP broker?
Technically speaking yes. It is an ECN/STP broker, because it routes your orders to a liquidity provider electronically and without any human intervention. But what if that so called “liquidity provider” is another market maker broker that belongs to the same company but with a different name, or a sister company?
That is still an ECN/STP broker from the electronic and technological point of view. But it is a fake ECN/STP broker, because he routes your orders to another market maker broker that rips you off and shares the profit with him (the broker). Or, it routes your orders to a different system with a different name which indeed belongs to the same company. I mean they take your money from one pocket and put it in another pocket. In both cases, you are not trading with the real currency world. You are dealing with a market maker broker that wants you to lose.
Why do they do this?
They do it because they want to claim they are ECN/STP, not market maker. They proudly advertise it on their sites. As I mentioned, they are ECN/STP from the electronic point of view, but they are market maker indeed.
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Who Is a True ECN/STP Broker?
A true ECN/STP broker is the one that its platform is connected to at least one trusted and well-known liquidity providing organization (like Bank of America, Goldman Sachs, JP Morgan, Citi Bank, Nomura, HSBC) that has nothing to do with brokerage firm and there is no relationship between them. The broker just routes your orders to the liquidity provider. The liquidity provider makes money through the spread and swap and the broker makes money through the commission they charge you. You pay the spread and swap to the liquidity provider, and the commission to the broker.
Nowadays, most true ECN/STP brokers are connected to several liquidity providers at the same time. When you want to place an order, the system automatically chooses the liquidity provider that is offering the best price, and your order will be routed to that liquidity provider. Therefore, your orders will be distributed among several liquidity providers and none of them will have any chance to know your account and go against you in case you make money. That provides the best possible service for you as a trader, and because liquidity providers compete with each other, they offer lower spread every day which is good for retail traders.
Some brokers are true ECN/STP brokers, but they increase the spread in addition to the commission they charge you. What they add to the spread is called markup. They are not allowed to do that, unless they let the clients know. However, many of them don’t inform the clients about this hidden fee and extra charge and when you ask them why the spread is too high, they answer that it is the market’s normal spread, which is a lie. So, even a true ECN/STP broker can cheat you too. Read this: 6 Ways Brokers Cheat You
So, when you want to choose a broker, make sure it is a true ECN/STP broker first. Also ask them if they charge markups or not. You have to ask them about this and ask for proofs. In case they refused to give you a good answer, don’t open an account with them.