Choosing the right broker is a huge part of being a forex trader. It is important that you understand the differences between all the types of forex brokers, the benefits each of them provide, the trading platform it allows, and so much more. The first thing you need to look for in a broker is the regulation, that assures your money is safe and backed up by financial authorities. Here we are going to talk about the most popular types of forex brokers: ECN, STP, and hybrid.
ECN (Electronic Communication Network)
This type of broker is of the group of no dealing desk brokers. which means that trade orders go directly to liquidity providers and allow you to access the real market unlike market marker brokers that make money through the spread and they tend to take the opposite side of your trade.
ECN brokers display the order information and execution rates in real-time as they fluctuate. These trades are processed electronically so they have a reduced human error rate. The dealing spreads aren’t set at a customary fixed width which means they can fluctuate on the high volatile moments. They usually have low spreads and charge a commission for each trade.
With an ECN broker, all the transactions are processed with the interbank market. One of the disadvantages of this type of brokers is that you have to trade large volumes of money and you are not able to trade micro-lots with them. Sometimes the minimum lot they allow you to trade is 0.1 and you need a minimum amount of money to trade that not many traders have.
ECN acts as a form of a hub which is the major liquidity source and is represented by banks and major market players.
If you are looking to trade small amounts of money this type of broker may not be the best choice for you.
STP (Straight Through Processing)
This is the second type of broker that requires no dealing desk. This type of broker has its own internal liquidity pool that is represented by different liquidity providers. The transactions are all computerized (this is something that it has on similar with ECN brokers). One of the great advantages of these trades is that there is no human-related error. Another of the benefits of using this broker is DMA which stands for direct market access in which the orders are filled out at the best possible price they apply low spreads. They don’t offer fixed spreads and don’t have requote either.
Unlike ECN brokers you can trade small lots with STP ones. It works really fast which makes it a great choice for those who are looking to do scalping or trade news.
Since there is no dealing desk monitoring the transactions that come from each client, all of your orders are anonymously executed via the market network. They do not trade against clients order but they win money for every trade their clients order.
This is a combination of both ECN and STP brokers. They offer the best of both worlds and avoid market-making. Some forex brokers offer a certain type of executions for certain accounts and another type for other accounts. For example, if you have an account with a big amount of money the broker may offer you the chance to use an ECN account, while if your account has a small amount of money you may don’t have the ECN choice available. This type of broke involves a low human error rate, it is fully electronic. One of the disadvantages of this type of broker is that it can still present system failure errors, programming loss, and security breaches.
There isn’t such thing as one broker that works perfectly for everybody. You need to keep in mind factors like the amount of money you are trading if you can use MetaTrader 4 or Metatrader 5 if you are looking for low spreads and a high commission or just the opposite. Each of the brokers has its advantages and disadvantages. If you are looking to do scalping and want to trade micro-lots an STP broker is your best choice. If you have a considerably high amount of money and want low spreads to try with an ECN account. Always work with a reputable and regulated broker that protects your money and makes an enjoyable experience for you.