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Monday, 2 July 2012

ECN STP Forex Brokers

What Does STP - Straight Through Processing Mean?

An initiative used by companies in the financial world to optimize the speed at which transactions are processed. This is performed by allowing information that has been electronically entered to be transferred from one party to another in the settlement process without manually re-entering the same pieces of information repeatedly over the entire sequence of events.

What Does ECN - Electronic Communication Network Mean?

An electronic system that attempts to eliminate the role of a third party in the execution of orders entered by an exchange market maker or an over-the-counter market maker, and permits such orders to be entirely or partly executed.

The Disgruntled

The broker grumblings and trading malcontent is not new and has been around since the Forex market began. As of late this discussion is exceedingly fierce and is gaining in popularity. As we all know change is not something we embrace. Such questions like, Why are my spreads changing and getting wider? I do not ever remember spreads being this far apart. My order slipped more pips then it would have normally. What is going on? Why is this happening now?

As the market changes and adapts the Forex trader evolves. The evolution of a trader is witnessed by the news traders which have needed to change strategies, and how they trade economic news. The potential to make great gains is apparent with economic news releases, and it was not long before traders caught on. Such strategies as straddling the market prior to news releases became more prevalent.

How does the market react to such changes?

How does this affect brokers, traders and what are the consequences of using ECN/STP type brokers and does it benefit a trader to use an ECN given the above circumstances? The answer to this requires some further inspection into market makers and their relationship with Interbank Forex market and subsequent liquidity providers.

It's no secret retail brokers are the counter party to all of your currency market transactions. When you execute your trade the opposite side of your trade is taken by another trader just like you. The resounding affect for the broker is they receive a commission for facilitating your trade.

Now let's look at another means to facilitate your trade. Rather than sending your trade to liquidity providers for processing there are market makers which take the opposite side of your transaction in order to assist facilitating the trade. A Market Maker may decided because the feel your going to lose anyways it benefits them to take your order and keep in house.

In the first instance where one trader is available to take the opposite side of your trade is ideal until there is no volume then you get to understand an ECN and STP broker. With an ECN and STP you are submitting market orders. Market Orders get filled when there is the volume to do so otherwise you get off quotes which tell a trader nobody is willing to risk taking your trade/order. During times of high volatility such as economic news, spreads can widen with an ECN, STP and any other type of broker unless you have a broker which charges a fixed spread. Not only will the spreads perhaps widen you may not get your order filled at the price you intended. Seconds could pass before you get filled causing slippage or requoting.

So now you see how it's possible to be perfectly happy with your broker and then the rules change and you start to see more instances of slippage, more requotes and or off quotes then you had seen previously. You are really at the mercy of the market. The more traders that jump on board and trade economic news the less likely the conditions will remain favorable. How long do you suppose a broker and subsequently a liquidity provider going to be willing to lose money. So it should become obvious a business model change is in order. The same ECN broker you used previously for news trading is now not so willingly to facilitate your order(s) at the price where you could potentially turn a profit. Your broker is having issues with all of those orders for Euros that nobody wants now. So what does the market maker do now? Well they will slip the price, widen spreads or shutdown the ability to trade during new releases.

So you're not happy anymore. Is it time to look for a new broker?

When the playing field changes for you as a trader suspicion sets in and you start to wonder if your broker is not taking advantage of you. You have certain expectations when you go to place your order and now it just seems like you're not making any money and you feel as though your broker has pulled a fast one. So you start to look around for a better deal. You ask your trading colleagues and search the internet to make a change.

So what now? Where do you look?

In your search you find the perfect broker for your specific needs. You read the hype and it seemed vaguely familiar but you need a home and they are telling you there are no requotes, off quotes or slippage. So you proceed to download their demo, and the spreads are amazing. Not only that but they have straight through processing and direct market access.

The STP/ECN experience

Your perception and faith is once again restored. We always thought the STP/ECN model would finally put an end to cheating and if we ONLY could trade with a direct link to the market unlike those dirty rotten dealing desks we would be set to trade profitably and without intervention.

Immediately you begin to notice slippage even though you were sold a bill of goods of no slippage. So why does this happen? Well you are getting a taste of the true STP/ECN environment. You are not really getting slipped you are getting exactly what you asked for. A real dynamic market which provides traders with market orders. The market changes in a nano second at times, so because price is not static the price you requested is not always the price which is being offered at that time. So your not being cheated you are getting precisely what you asked for, the only difference is the price moved prior to your getting filled. In a heavily volatile market the differences can be more glaring then a pip or two and that's even if you get filled. It is possible during times of economic news you may not get filled at all. Bottom line just because you are selling does not mean someone is going to buy what your selling especially during times of uncertainty.

You should if you have not already get a feel for the market during news times where there is a frenzy of activity both from bankers and speculators on news. You will see price moves erratically so if you are planning to participate in this kind of market you should know all bets are off. There are no stops losses nor take profit price guarantees. You are at the mercy of what the market give you during times of heavy volatility.

Another consideration are commissions. With an ECN or STP broker you generally pay a commission and spread but at least the spread is a true raw spread and not increased or manipulated by your broker. You're seeing spreads the liquidity providers sets.

In the end your left wondering is an ECN really worth it?

It depends on your trading style if an ECN/STP is right for you. The reason these types of models are gaining in popularity is because of transparency. The STP/ECN model allows for pricing to go directly to the market without any intervention by the intermediary such as with a dealing desk type model. This model also can give you peace of mind with respect to their inability to take advantage of price manipulation. This is not an absolute fool proof nor absolute transparency however its what we have to work with presently. It is the best means we have to work with and as you have no doubt discovered where there is an opportunity to exploit, someone will always attempt to do so.

Bottom line is if you are happy then there is no need for you to change brokers or means of how you trade forex. STP/ECN models are not the be all and end all but if you are needing to get closer to the actual market then this may be the model for you. There are some really good market makers out there which offer enough benefit that is worth staying especially if you have a smaller account. Such things they may offer are never having to worry about losing more money then what is in your trading account. Perhaps you are trading with an EA or Expert Adviser which scalps the market for a few pips.

Obviously if your spreads are not tight then you are either not going to be profitable or not as profitable as you be with a company which provides guaranteed fixed spreads. Other considerations when choosing a broker include, leverage, speed of execution, funding methods and a host of other items you need to fully understand.

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