The biggest development in retail forex and CFD trading over the last few years has been a gradual shift towards ECN and STP execution. While ECN (Electronic Communication Network) and STP (Straight Through Processing) share many common traits, there is a significant difference between the two types of execution, a difference that can have a huge impact on your trading.
Both types of execution work in a similar way, that is with a per trade commission being the only involvement your broker has in your trading. This is in direct contrast to the market maker model, where the broker takes the opposite direction to all your trades. Go long the EUR/USD, and your market maker broker takes the opposite position.
The implications of the market maker model are clear to see. First and foremost, conflict of interest. If you work with a market maker and your trades are profitable, then by definition, your broker’s trades are negative. No matter how many layers of sugar-coating, working with a market maker involves a significant conflict of interest.
ECN and STP execution minimize that conflict of interest as the only involvement your broker has is the commission charged per transaction. This fee is usually expressed as a commission per round trip lot, where round trip lot is opening and closing a standard lot (100,000 units of the base currency.)
The difference between ECN and STP is where this commission is applied. In ECN, the fee takes the form of a commission on your trades. In STP, the fee is included in the spread your broker offers you, making the price on an STP broker all inclusive.
Essentially ECN is raw market price + commission, STP is raw market price + spread. In both cases the end price will be the same, just the calculation will differ.
This is particularly important if you use an EA (Expert Advisor). In this case, the EA’s algorithm might not be able to recognize the additional commission of an ECN broker, potentially leading to losing trades on what might have been winners.
With STP execution, that wouldn’t happen. Your EA would only have to factor in the trade spread, as there is no additional fee involved, making for simplified trading. Everything is in the spread.
At EuropeFX we wanted the best possible trading conditions for our clients which is why we opted for STP trade execution. This allows us to seek out and offer the best possible execution available to all traders, regardless of trading styles. Long-term, scalper, EA. All types of trading and trader profiles will find themselves immediately at home on the EuropeFX STP trading environment.