What are the Indicators of a True STP Broker?
|Straight through processing (STP) brokers operate without an intervention of a “dealing desk”. There is no market making such that all orders are directed to liquidity providers (other brokers and banks) where they are executed at the bid rate provided by those liquidity providers. Everything from placing the orders to closing them is done without any manual intervention. In such an engagement, the liquidity provider is a principal and final counterparty to your trade.
STP brokers are known to offer affordable Forex accounts, less or no conflict of interest between the broker and the client, higher price transparency, more availability in the marketplace and higher liquidity. They ensure the best Bid and Ask price, and the order is executed fast.
When choosing a broker, you have to make sure that you are choosing a true STP broker. The following are indicators of a true STP broker.
They have great liquidity
The number of liquidity providers that an STP broker has determines the depth of the liquidity pool. A true STP broker signs a business contract with a small group of liquidity providers (internal liquidity pool). The liquidity providers in this pool compete with each to offer the best bid/ask rates for orders from the STP broker. Some of the strong famous liquidity providers are; Barclays Bank, JP Morgan, Citi Bank, TD Bank and Wells Fargo.Liquidity pool depends on the number of liquidity providers an STP broker contracts. The more the number of liquidity brokers in a pool, the deeper the liquidity that results to a better bid/ask rate and resultant lower spreads. Having one liquidity provider is the same as having a market maker.
Market makers do not transfer all trades onto liquidity providers. Instead, they take the other side of trader’s position and use manipulative tactics to make a profit.
They have tightspreads
An STP brokerage usually makes a profit by charging traders a commission. The more they trade, the more they make money thus it is in their interest for clients to make money that helps to eliminate conflicts of interest between the trader and the broker.Brokers can offer fixed or variable spreads. A broker offering fixed spreads does not adjust spreads for clients based on the lowest bid/ask prices. The spreads remain fixed at all times. On the other hand, when a broker offers variable spreads, he picks the best Bid price from one liquidity provider and the best Ask price from another liquidity provider and delivers the best deal to his clients.
Beware of brokers who increase the spread (marking up) in addition to the commission they charge you, they could be market makers masquerading as true STP brokers.
They have transparency
Since there is no dealing desk, it means that the STP broker is more transparent with the client.The client trades into a true market that obtain better and quicker fills through an STP broker as opposed to an artificial market that may be created by a market maker.They offer anonymity
STP brokers offer anonymity for the client as there are no dealing desks monitoring orders coming in since orders are executed automatically through the market network. The liquidity provider does not know the trader; he only knows the broker. It’s advantageous to the trader for he can have as many open positions with the liquidity provider at the same time.
They provide quick execution
There are two main types of execution the first one being instant execution where the order does not go to the market. Instead, it is instantly filled by the broker. The other type of execution is referred to as market execution where the order is based on the available quote from the liquidity providers.
The absence of intermediary process allows the STP broker to process its clients order quickly without any delay. Also, the STP broker will not send re-quotes to its client’s which is a huge advantage to most investors. The STP broker can allow its clients to trade without any restrictions during the release of financial news.
Types of regulation
There are two types of regulation. STP regulation and match maker regulation. STP regulation allows the broker only to receive and directly transmit orders to liquidity providers without any intervention whatsoever. The regulations bar them from acting against the client. Should they disobey the regulations by acting against the client, consequences are that they lose their license for good.
Market maker regulation on the other hand not only allows the broker to send orders to the market but also to act directly as a counterpart. Market makers are allowed to deal on their own account thus enabling them to hold clients trade without transmission. This brings about conflict of interest as the traders loses becomes automatically the brokers gain.
True STP brokers offer a lot of advantages to a trader as opposed to a Dealing Desk Forex broker who “makes the market” for traders such that traders don’t see real market quotes and the broker makes money through spreads that are mainly fixed.
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