ECN vs STP: Differences, Pros & Cons, and Which to Choose?

Your broker is your partner in your trading business. However, selecting a broker is perhaps one of the areas that receive the least attention from new traders. 

This article is all about partner selection. We explain how orders are routed through the market, the various types of forex brokers, their advantages and disadvantages, and the key things to look out for in choosing a broker. 

Key Points

• ECN brokers offer direct order routing to the interbank market with low spreads and a commission fee, ideal for fast execution and scalping, while STP brokers provide variable routing with potential internal absorption of trades.
• Both ECN and STP brokers provide non-dealing desk execution with direct market access and low spreads, but differ in execution speed and fee structures.
• ECN brokers are transparent with commission-based pricing, suitable for high-speed traders, whereas STP brokers can offer both commission- and spread-based pricing, with variable and fixed spreads available.

Which One Should You Choose

Forex brokers can offer either a dealing-desk or a non-dealing-desk execution model. These execution models determine how the order placed at your terminal becomes live on the market. 

With a dealing desk broker, the order is either managed through a “dealing desk”, which is run and managed by your broker. With a Non-dealing desk (ECN and STP) broker, the order is routed directly to the interbank market.

An ECN broker can be ideal if:

• Your strategy requires the highest speed of execution
• You want the lowest bid-ask spread and you want the certainty of a flat commission rate
• You want the flexibility to execute trades both inside and outside normal trading hours, as ECN brokers participate and facilitate in central market exchanges

An STP broker can be ideal if:

• You would like to have no commission and low spreads on your trades
• You would like direct access to the interbank market for forex real-time trading

ECN and STP Explained

Electronic Communications Network (ECN) brokers are forex brokers that route your orders directly to the central interbank market, where they are filled at the best market rate with no dealer intervention. The bank that fills your order has no knowledge of your identity or where your stop order is placed. Hence, ECN brokers only provide routing services for your trades ^[1].

Straight Through Processing (STP) is a technology used by brokers to electronically route trades directly to the market. STP brokers pass your orders directly to a counterparty, which might be another STP broker, a market broker, or even an ECN broker. This means that the way a specific order is routed might differ from that of another. Trades do not pass through a dealing desk – instead, they go directly to the market ^[2].

ECN and STP are non-dealing desk brokers; your orders are never routed to the dealing desk, as neither ECN nor STP brokers have dealing desks, and this prevents a conflict of interest between you and your broker. Your order is filled entirely electronically at the best market price.

Similarities between ECN and STP Brokers

There are quite a few similarities between ECN and STP brokers: 

	ECN Brokers	STP Brokers
Dealing desk	No	No
Low spread	Yes	Yes
Direct access to market	Yes	Yes

Differences between ECN and STP Brokers

A few differences between ECN and STP brokers:

• ECN brokers are considered to be more transparent
• They route clients’ orders to the interbank market, whereas STP brokers can route orders to any of their liquidity providers such as banks or interbank exchanges
• They always charge a commission on trades, whereas STP brokers can charge commissions and gain from the spreads
• ECN brokers always offer variable spreads, whereas STP brokers can offer fixed spreads

	ECN Brokers	STP Brokers
Order routing	The order is routed straight through to the central interbank market and filled at the best market rate, with no dealer intervention.	Order is routed directly to a counterparty that might be the interbank market, another STP broker, market maker, or even an ECN broker.
Speed of execution	An ECN broker executes trades on the ECN for potential investors, resulting in the lowest execution time.	The speed of execution depends on the exact route it takes on specific orders.
Fee structure	Always charges a small commission for trades and always has variable spreads.	Can charge commissions and also earn from the spreads. STP can offer variable and fixed spreads.

1. Order Routing

ECN brokers route your orders directly to the central interbank market. 

STP brokers pass your orders directly to a counterparty, which might be another STP broker, a market broker, or even an ECN broker. This means that the way a specific order is routed might differ from that of another. However, trades do not pass through a dealing desk.

2. Speed of Execution

An ECN broker executes trades over the ECN for potential investors. Because of the way an ECN operates, dealing with such types of brokers also results in lower costs and less trading time.

Although an STP broker routes an order directly to their liquidity providers, how fast a specific order is executed depends on the exact route it takes.

	CFDs	Stocks
Flexible trading style	Allows any trading styles (scalping, day-trading, swing-trading)	Best suited for swing traders and investors interested in share ownership. Pattern Day Trading (PDT) rule applies to US traders
Short selling	Can be done	Need to borrow shares from your broker
Transaction costs	Spreads and swaps	Brokerage commission
Leveraged product	Leverage is built-in	Need to have a margin account, not a cash account, to get margin
Derivative product	A derivative product with flexible underlying	Not a derivative product

3. Trading Fee Structure

ECN brokers can only be compensated through small commissions on trades.

STP brokers can charge commissions and also gain from the spreads. STP brokers can offer variable and fixed spreads.

Advantages and Disadvantages of ECN Brokers

Advantages:

• Trade with low bid-ask spreads directly from the interbank market – no re-quotes or slippage
• Tightest spreads, which can potentially be zero at times
• The ECN broker will not take a position against you
• The quoted prices are likely to be more volatile and therefore better suited to scalping strategies.
• Direct access to the interbank market for forex real-time trading ^[3].

Disadvantages:

• There is always a commission charged on each trade

Advantages and Disadvantages of STP Brokers

Advantages:

• Trading with low bid-ask spreads
• The prices quoted are likely to be more volatile and therefore better for scalping strategies
• Direct access to the interbank market for forex real-time trading

Disadvantages:

• STP bridges are commonly used by smaller brokers to connect their traders to large brokers. These larger brokers can either connect the trader directly to the market or absorb the trades internally.
• Reduced transparency on how the orders are routed

Conclusion

Despite commission costs, ECNs have lower costs over the long run due to their low spreads and ultra-fast execution. However, STP accounts are also a viable choice given their trading speed and the overall trading environment.

If you are finding it difficult to make the choice between ECN and STP, you can try to trade on a demo account to get familiar with both platforms and decide on a system that suits your trading style. Regardless of your choice, always choose a regulated broker and ensure the broker you choose has credibility in the market.

References