What is the difference between ECN, STP & Market Maker?

/blog/What is the difference between ECN, STP & Market Maker?

There are many significant differences between Market Makers (MM), ECN (Electronic Communications Network) brokers and STP (Straight Through Processing) brokers but in order to fully understand all the differences between these types of brokers traders first need to know how they process trading orders, how they handle lot sizes and more important if they ask for dealing desks or not.

Market Maker

The MM (Market Maker) which is also known as the DD (Dealing Desk) is a unique type of broker because it does not reflect the market in a direct way instead it just quotes prices similar to the pulse of the trading market.

Any kind of orders entered are processed first internally and never step out towards the market.

A very good feature of the MM is the speed of the execution without any additional re-quotes.

The only negative side of the market maker is that any capital gain leaves the broker’s account into yours and any capital that you happen to loose ends up in the broker’s account, this translates into a serious conflict of interest.

Straight Through Processing

The Straight Through Processing is also known as the STP and it represents a technology that does not require any kind of dealing desk because all types of orders are rerouted directly towards the broker’s liquidity providers. In turn, prices are directly executed on the bid or ask rate provided by the liquidity providers.

In this specific case, the liquidity providers are the big banks, hedge funds, and investors that take the role of counterparties to each trade. In most cases, the STP broker incorporates a liquidity pool which is represented by many liquidity providers that are in competition for the best bid/ask spreads.

In other words, STP means that the broker acts exactly like an invisible connection provider between the user (the trader) and the financial market.

A nice feature of the STP is DMA which stands for Direct Market Access, this means that a broker is channeling the client’s orders directly to their liquidity area, therefore, orders are used at peak efficiency with the best prices with just a small mark-up spread.

Another positive fact about the STP is that there is only a minor, insignificant, conflict of interest because of the high accuracy of the prices.

Electronic Communications Network

The Electronic Communications Network is also known as the ECN and this is the place where brokers let you gain full access to the trading market, therefore a reliable ECN broker grants you the possibility to see the real prices of the trading market without any kind of filters and also presents them in the right order.

It is here where you trade with other traders and financial institutions. An important fact worth remembering is that you never get the option to trade against your own broker.

Some time ago the MetaTrader4 ECN seemed a bit too excessive as a matter of fact the initial reaction to this innovative concept was that it is too good to be true thus it was deemed impossible by many market participants. This type of broker is considered to be very ingenious because it provides a more direct approach.

The STP and the ECN brokers are similar in many ways but the main difference between them is routing because the STP can pick a different liquidity provider out of their liquidity area, while the ECN behaves more like a hub. This hub acts mostly as a very efficient and dynamic liquidity source because it is backed up by banks, hedge funds, and other significant market members.

A nice feature about this is that there is absolutely no conflict of interest, but it does guarantee fills and the smallest possible lot is 100,000 and it also involves a commission.

Ending ideas

To put this into a nutshell you can make money easily and consistently with MM (DD), ECN, and STP brokers without having to be tensed about any kind of problems, but it is worth mentioning that a MM market maker broker can bring some fluctuations to the profit-making process. A reliable broker will always deploy a serious amount of effort in offering the best services for you.

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