Selecting a trusted and reliable broker is a crucial step before you start trading. A good trading platform is your long-term partner always ready to lend a hand or provide a set of required trading features. However, some beginners are confused with the selection of websites and types of brokerage services provided.
In this article, we will explain the difference between ECN and STP trading. You will learn how they route orders, their main pros and cons, and other insights to let you decide, which type suits you better and why.
There are generally two types of brokers. The first one manages orders through a so-called “dealing desk”. Both ECN and STP brokers refer to the type of non-dealing desk platforms. It means all orders are routed directly. This fact makes them a good option for several reasons:
Additionally, clients can benefit from real-time trading conditions along with direct access to the interbank market.
So, what is ECN/STP trading exactly? How are the two concepts different and which one to choose?
First of all, both ECN and STP refer to non-dealing desk brokers. Users have their orders filled 100% electronically on the fly, while the system automatically selects the best available price. This feature eliminates a potential conflict of interest between a trader and his or her broker.
ECN stands for Electronic Communications Network. These brokers deal with no intervention while routing your orders to the interbank market directly. As stated earlier, each order is stated with the best available price on the market. The main mission of the ECN broker is to deliver routing services despite the trader’s identity or stop orders being placed.
STP means Straight Through Processing. The technology takes each trade and passes it to the market or another counterparty electronically. In simpler words, orders are also routed automatically. However, the path can be different.
The main similarity is that neither of the brokers sends orders through the dealing desk. Instead, they path them directly to the market. Also, you need to consider some other similarities before you start trading:
Despite so many similarities, ECN and STP trading is not the same.
Before you select a broker to start trading, it is very important you clearly understand the following differences:
Selecting the type of broker will depend on the strategy you chose as well as individual trading preferences. To make your choice a bit simpler, we highlighted some of the core points you need to take into account.
As mentioned before, the main difference between ECN and STP brokers is in the way they route clients’ orders. ECN transfers each trade directly to the interbank trading environment skipping intermediaries and counterparties. This fact makes ECN a better option for traders who want to execute multiple orders instantly, for example, scalpers.
STP brokers send trades to other counterparties. Of course, it does not mean execution delays, as they still do not use dealing desks. Nevertheless, it may still affect the overall execution speed.
Considering the previous point, it is clear that ECN brokers deliver orders faster. The execution speed is higher. In simpler words, investors get more trading time in addition to lower costs.
As for the STP brokers, the execution time can vary depending on the route selected to deliver your orders to the market. As we mentioned earlier, they can be different.
The question of costs and fees is very important, especially for beginners who only start trading. ECN charges a commission for every trade despite the outcome. You either win or lose but still have to pay the commission. Generally, it is quite small.
STP generally charges commissions from gains. Although we said they establish mainly fixed spreads, some platforms provide traders with variable ones.
Now, let’s highlight some of the core hits and misses of trading with an ECN broker.
The main disadvantage here is the traders will always be charged commissions on every order they open. It does not matter if they lose or win. They will always have to pay fees.
It does not mean ECN is the only option to start trading. STP brokers can also make sense depending on specific strategies and approaches. Let’s have a look at their advantages.
As you may see, the benefits are mainly the same.
As for drawbacks, STP trading is generally used as a link between a trader and bigger platforms. It results in the lack of order execution transparency. In simpler words, traders cannot track the route of their orders.
In the bottom, both brokerage models can be a good option to start trading. ECN provides a bit more transparent order routing in addition to volatile price quotes and low bid-ask spreads. It can all result in lower trading costs faster execution in the long run.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.