ECN vs. STP vs. Market Maker: What’s The Difference?

Trading with FX and CFD brokers is based on the OTC concept. This means that traders are operating with instruments not traded on traditional exchanges and that they do not own the actual stocks, indexes, or currencies. In fact, they speculate on the value of these assets, and the value itself is derived from somewhere else.

Three types of brokerage services are available to you when you trade FX or CFDs:

Throughout the article, we will discuss Electronic Communication Networks, Straight-Through-Processing, and Market Makers in detail.

But first, let’s start with a definition of Forex brokers

As already mentioned, Forex transactions occur over-the-counter (OTC) between dealers from all around the world, as opposed to equities markets, which are transacted on major stock exchanges, such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE). Due to the decentralized nature of this network of market participants, the rate of exchange of two currencies at any one time may range at every brokerage.

Most of the world’s trading operations are conducted by the world’s biggest banks. Generally, the market in which these institutions deal is referred to as the interbank market. Interbank trading is unavailable to ordinary retail traders. It is because they have no credit ties or status to cooperate with these major institutions.

However, the good news for retail traders is that they can use different brokers to trade on Forex markets.

Now that you’re informed about Forex brokers, let’s dive deeper.

First, let’s discuss the Electronic Communication Network (ECN).

Electronic Communications Networks (ECNs) are modern digital trading platforms connecting sellers and buyers of stocks and other assets through immediate electronic transfers. While electronic trading via ECNs may differ, they share one common aspect: challenging large brokerage companies and hedge funds, especially those on Wall Street, because they provide much lower transaction costs by removing traditional intermediaries. ECNs are frequently utilized by online brokerages, institutional investors, and retail traders thanks to their high speed and low expenses.

An ECN broker is a middleman who employs Electronic Communications Networks to connect clients to markets and traders who trade with fiat currencies. An ECN broker may offer lower bid/ask spreads compared with other brokers because it combines rates from multiple market participants.

An ECN broker can only combine transactions made by other market participants and, most importantly, cannot trade against the client. Although ECN spreads are usually lower than those used by standard brokers, users are still charged a fixed commission for every transaction.

Using an ECN allows traders to operate outside of standard trading hours, providing a tool for those unable to engage when traditional exchanges are open. It also removes the larger spreads related to traditional brokers and lowers total charges and expenditures.

A solid feature of the ECN is that it provides anonymity for those concerned about their privacy. This could be particularly enticing to those wishing to make larger investments.

ECN brokers do not have trading desks and do not forward order flow to Market Makers. Alternatively, they link trading counterparties digitally and route bids to liquidity providers.

Regarding the main advantages of ECN, the first would be that because bid/ask prices are acquired from different places, traders will often obtain better bid/ask rates. Besides that, it is sometimes achievable to exchange currencies with minimal spread.

Regarding the downsides of ECN, their exchange platforms are generally more challenging to use, especially for newcomers. Moreover, due to the dynamic spreads, calculating stop-loss and breakeven positions in pips ahead of time can be problematic.

Currency pair spreads on ECNs vary depending on the pair’s trading activities, as opposed to set spreads supplied by Market Makers. ECN offers minimal spreads during highly active trading periods, particularly in highly liquid Forex majors currency pairs, such as EUR/USD, USD/JPY, and GBP/USD.

Forex brokers use Straight-Through-Processing, also known as STP, to transmit the order information of their customers to liquidity providers. These are known as No Dealing Desk brokers (NDD). Because they don’t route orders through a Dealing Desk, they don’t take the other side of their customers’ trades; instead, they connect two sides of the deal. NDD STP brokers connect a large number of liquidity providers, each of which quotes its bid and ask prices.

Here’s an example to help you understand.

Think of buying 1000 units of EUR/USD at 1.1050. A broker sends the order to a liquidity provider. When your transaction is approved, the liquidity provider will sell your units at 1.1051, and you will buy 1000 EUR/USD units at 1.1052. Therefore, your broker will receive a commission of one pip.

Remember that STP brokers typically offer dynamic spreads due to the changeable bid/ask quotation. The wider their liquidity providers’ spreads, the wider their own will be. Some STP brokers use fixed spreads, but the majority use dynamic spreads.

The Straight-Through-Processing model has its positives and negatives too. When we mention upsides, they include the most reliable currency rates offered, and all orders are immediately completed with the minimal waiting time. Moreover, quotes may be bypassed on STP platforms. What is also considered an advantage of STPs is that all associated risks are significantly lower than with other kinds of brokers.

When it comes to the negatives of STPs, it is vital to remember that they are not best suited for small traders since the minimum trading capital required may be too high.

Forex brokers who employ a Dealing Desk (DD) model and generate revenue by charging clients spreads and providing liquidity are referred to as Market Makers.

Market makers typically take the other side of a client’s transaction. They purchase and sell currencies in the over-the-counter market at a  published price. Basically, if a retail trader buys a currency, a Market Maker sells it, and vice versa.

Market Makers are able to regulate the pricing at which orders are completed by establishing fixed spreads.

Also, clients of Market Makers do not have access to actual interbank market rates. However, broker competition is so intense that Market Makers’ prices may be relatively equivalent to interbank prices, if not the same.

Say you opened a buy position in GBP/USD with your Market Maker broker for 1000 units.

To confirm the order, your broker would first try to obtain a matching sell order from another client, or it will send your transaction on to its liquidity provider.

When it comes to the upsides of Market Makers, they provide easy-to-use trading platforms. Also, currency price changes may be less turbulent than those offered on STPs or ECNs, which may disfavor traders who use scalping methods.

Order execution by market makers may be biased due to the fact that they may trade against you and display lower bid/ask prices than another market maker or an ECN. Besides that, most Market Makers dislike scalping and typically put scalpers on manual execution, which means that their requests may not be completed at the desired pricing.

The term ECN signifies that the broker is linked to an electronic trading system in which competitive bids and offers are routed to a single liquidity pool. On the other hand, STP is used to demonstrate that the broker does not meddle in the execution of orders, and so all trades are completed electronically at the quickest response pace. Technically, the MM-broker can also be assigned to this category if execution is performed by specific software rather than manually by the dealer.

Brokers who transfer all transactions directly to a liquidity provider are commonly referred to as A-book brokers. The essential advantage of this strategy is that the broker does not face the dangers of customer trading and instead profits from transaction turnover. As a result, it benefits the broker when users do not lose money and trade regularly. Therefore, it is widely known that these brokers are considered dependable and successful.

If you are a broker, who wants to employ the ECN/STP brokerage model, the registration process is less costly than with MM, and the regulations are straightforward. This is essential as traders prefer regulated brokers. Having uncontrolled offshore corporations damages the trust of clients and the reputation of the company.

Unlike ECN/STP, Market Maker does not guarantee positions on liquidity providers and is obligated to pay for clients’ winning trades with their money. Remember that their profits are customers’ losses. MMs are commonly referred to as B-book brokers, and this model bears a greater risk. However, most customers lose their money, so typically, the revenues of MM brokers are more significant than those of ECN and STP brokers with much the same trading volumes. Furthermore, when a broker chooses the MM model instead of STP, he will most likely want more risk measures to detect platform violators and conduct activities to minimize the effects of such action. 

If you wish to obtain an MM broker approval in a recognized non-offshore jurisdiction, you will require a substantial security deposit which starts at 100,000 USD. Moreover, you will have to submit reports to the regulator, which will involve additional resources.

There are also a number of offshore jurisdictions that do require Forex certification. To obtain greater client trust, some brokers form an MM-company offshore while also establishing an ECN/STP license in a regulated area. In this strategy, the offshore Market Maker business functions as a liquidity provider. Using it, a broker can advertise a registration from a credible authority while remaining an offshore Market Maker at a very low cost.

Numerous brokers combine these methods and send only a portion of their clients’ orders to A-book execution, while the remainder is handled by the B-book system. Also, there may be a difference in the scheme: some brokers transfer clients directly to the liquidity pool without letting their clients know. Moreover, others provide individual ECN/STP accounts with assured order delivery to the interbank market.

It is important to note that deposit protection differs as per rules. For example, if your broker is registered by CySec, it is 20,000 euros. When you decide to use a broker in the UK, it would be 50,000 pounds if the broker is authorized by the FCA. Some brokers even provide extra insurance to clients with high net worth.

Brokers sometimes use the term “No Dealing Desk” as a marketing technique to insinuate that Dealing Desk brokers profit from their customers’ misfortunes. In fact, there aren’t too many distinctions because your transactions are always routed via a Market Maker or the liquidity provider in all situations. On top of that, reliable data indicate that traders perform similarly to all types of brokers.

It is possible to find reputable brokers in all the models mentioned above. You should select a broker situated and authorized in a place with tight restrictions, such as the United Kingdom or the US. The essential thing is to choose a broker who gives deposit assurance and appropriate trading conditions.

However, always remember that you, not your broker, bear the biggest risk when trading. However, solid brokers usually employ risk management tactics to protect their clients.

Thus, there are numerous aspects to consider when determining the most suitable kind of Forex broker. Each of them offers unique benefits. Generally speaking, the best option for you and your trading style is typically determined by the type of investment strategy and the amount of an initial deposit you can use.