Before investing, you want to consider which route to take when choosing a broker. There are three types which investors can choose from which include: Market Maker, STP and ECN.
How do they differ?
Market Maker, as the name suggests, means that the broker makes their own market. What this means is that every time you buy or sell, the broker is, in essence the counter party.
An ECN broker, or Electronic Communications Network, offers you direct trading on the real market meaning that the broker's platform is electronically connected to the network of international banks or liquidity provider. This type of broker consolidates price quotations from multiple market participants which oftentimes offers its clients narrower spreads.
STP brokers, or Straight through Processing, are a combination of both Market Maker and ECN brokers. They may place your orders to the next counterparty (e.g. banks or larger brokers) without running the order through a dealing desk which means it provides immediate access to the interbank market.
Executing trade - how is it done?
The buy and sell quotes presented in the market maker platform are determined by the broker however the quotes you see in a market maker platform change according to the movement of the market. When you place an order to trade, the market maker will either buy from you or sell from their own inventory in a matter of seconds.
With an ECN broker, you have direct access to other investors in the market. You are provided with a consolidated list from your broker, of price quotes from several markets in order to give you a number of alternatives. As an investor, you decide when to execute a trade with the ECN broker acting as a mediator, who generally offers you tight spreads.
An STP broker, will sometimes route your orders to the market, and other times they won't in which case they are more like a market maker. Depending on what the STP broker decides, your orders are filtered as to which route to take, thereafter your order is executed. The broker weighs the two options based on what the current price quotes offer.
What about commission?
A market maker makes a profit by trying to sell high and buy low so the spread which they determine for the client is of interest for them.
The ECN broker gives you direct access to display your order within the market thus the broker's commission comes from the mark-up on the spread prepared for you. Oftentimes, ECN brokers will set a fixed fee.
As far as an STP broker goes, their commission comes from two possible sources: commission arbitrage on routed orders (coming from the counterparty) or from the spread which the STP broker had prepared for you prior to executing the order.
|Desk dealing/No desk dealing
|No desk dealing
|No desk dealing
|Type of contact with market
|Broker is the market
|Direct access to market
|Chooses one of two routes (directly to market or counterparty)
|How quotes are presented for clients
|Quotes both a buy and sell price, hoping to make a profit on the turn
|Comparison of various prices from multiple market participants
|Displays own quotes which are correlated to the actual inter-banking quotes