Many foreign exchange dealers on the market (including the UACTCTK trading platform) provide two types of accounts: STP and ECN. In addition to the difference in spreads and commissions, the two accounts also use different platforms and different modes to process customer orders. This article will introduce the differences between STP and ECN trading platforms.
| STP Trading Account | ECN Trading Account |
| • Mostly floating spreads | • Extremely low floating spreads and commissions |
| • Just a link between traders and liquidity providers | • The link that connects traders with liquidity providers and other participants |
| • Prices come from liquidity providers | • Prices are derived from liquidity providers and ECN participants
• Orders are automatically executed without requotes |
| • Orders are automatically executed without requotes | • Display market depth DOM and liquidity information |
STP stands for Straight Through Processing. When a client trades on a foreign exchange trading platform operating in STP mode, the order will be sent directly to its liquidity provider (bank, quotation provider or other broker) for processing without human intervention. Liquidity providers are generally able to conduct foreign exchange transactions in another level of the market, directly connected to the market between banks.
Generally speaking, behind the STP foreign exchange trading platform, brokers will closely connect and cooperate with liquidity providers. Some STP platforms have only one liquidity provider, while others have several to increase their liquidity.
The buy or sell prices quoted by each liquidity provider are not exactly the same. The broker will select the best price and display it on the trading platform. Customers of the STP platform can see the real-time market price, and when an order is established, it will be immediately sent to the market for execution. The more liquidity providers behind the broker, the greater the liquidity, and the smoother the order will be completed.
Many brokers claim that their trading platforms are true ECN platforms, but in fact the system behind them is just STP. Strictly speaking, there are only a handful of trading platforms that meet the definition of ECN.
Generally, brokers that implement the STP model mainly act as intermediaries, sending all client orders to liquidity providers.
Since the spread of liquidity providers is generally low, brokers can add a point or half a point of spread to make a profit. If the broker cooperates with several liquidity providers, it can choose the best buying and selling prices to achieve a lower spread, thereby increasing the profit ratio.
The spreads of STP trading platforms are mostly floating. Of course, brokers can also set fixed spreads in the platform, but this is unlikely.
ECN stands for Electronic Communications Network. A foreign exchange trading platform operating in the ECN mode allows clients to trade with other clients. In other words, a client's order can be matched with orders from other participants in the market. In this ECN market, each participant (bank, retail foreign exchange trader, hedge fund, broker, etc.) will send a competitive buy or sell quote to the ECN system, and then match the transaction. When the order appears opposite in real time, it will naturally become the counterparty to complete the transaction. The broker provides a market for each participant to match transactions with each other through the ECN model platform.
People often confuse the STP model and the ECN model, mistakenly thinking that the STP foreign exchange trading platform is the ECN foreign exchange trading platform. The real ECN model must have a data window on the broker's trading platform, which displays the market depth DOM (Depth of Market). The market depth allows customers to see the buy or sell orders and sizes of other participants, which is very transparent.
The spreads of ECN trading platforms are very low, but they are all floating. Generally, brokers who implement the ECN model always charge fixed buying and selling commissions, because one of the major features of ECN is the spread close to zero. Brokers will not increase the spread to make a profit, but instead charge some commissions, which is also their only source of income.
Regardless of the ECN or STP model, brokers do not trade against clients on the platform. As long as their clients trade enough, brokers can benefit from a slight markup or trading commission. The profit model of ECN and STP brokers is roughly the same. Brokers hope that traders can also make a profit so that they can continue to maintain long-term stable income through spreads and client funds.
However, some STP brokers still mix DD (Dealing Desk), that is, the "dealer platform" model. This is because the liquidity provider behind the broker may stipulate the minimum transaction amount, which means that small transaction orders will not be sent directly to the liquidity provider, so the broker becomes the client's counterparty. Then, the broker will manually collect the orders and throw them into the market for hedging. Before hedging, the broker can classify the customers, and only those with high profit rates will send the orders to the market for hedging, which will be handled by banks and other counterparties; for customers with higher loss rates, the broker will act as their counterparty, and their losses will become the broker's profits.
In summary, the ECN model can be said to be the most transparent in foreign exchange transactions. Brokers only make profits through commissions, not through spreads, and will not become counterparties to clients.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.