As the name suggests, non-trading counter brokers do not pass their clients’ orders through the trading counter. This means that they do not conduct hedging transactions with customers, but simply connect the two parties.
Non-over-the-counter brokers are bridgers: they build a structure connecting two areas above an area that is impassable or difficult to pass. Non-over-the-counter brokers either charge a smaller amount of trading commissions or increase the bid-ask price by slightly increasing the spread.
Non-over-the-counter trading brokers can be straight-through transactions or electronic communication networks plus straight-through processing.
What is a straight through processing (STP) broker?
Some brokers claim that they are real electronic communication network brokers, but in fact they only have a straight-through processing system.
Forex brokers that use a straight-through processing system directly transfer their client ’s entrustment to liquidity providers who have access to the inter-bank market. There are many liquidity providers for non-trading counter through-process brokers, and each provider has its own buying and selling prices.
Suppose that a non-trading counter through-process broker has 3 liquidity providers. In their system, they will see three different sets of bid and offer prices.
Their system will then sort out the buying and selling quotations according to their quality. In this example, the best bid price is 1.3000 (you want to sell at a high price), and the best bid price is 1.3001 (you want to buy a lower price, the better). Buy / sell is now 1.3000 / 1.
Is this the quote you see on the platform?
of course not!
Your broker is not charitable! Your broker will not spend so much effort organizing these quotes for free!
To compensate for their labor, your broker has increased slightly, and the buying and selling price is usually a fixed value. If their policy is to increase the price by 1 point, the price you see on the platform will be 1.2999 / 1.3002. You will see a spread of 3 points. 1 point spread to you this becomes 3 points.
So when you decide to buy 100,000 units of EUR / USD at 1.3002, your order is transferred to liquidity provider A or B through your broker.
If your order is accepted, liquidity provider A or B will have a short position of 100,000 units of EUR / USD at 1.3001 and you will have a long position of 100,000 units of EUR / USD at 1.3002. Your broker earns 1 point.
The change in buying / selling prices is also the reason why most pass-through brokers offer different spreads. If their liquidity provider’s spreads widen, they have no choice but to expand their spreads. Although some straight-through brokers offer fixed spreads, most offer variable spreads.
What is an electronic communications network (ECN) broker?
On the other hand, real electronic communication network brokers allow their clients’ commissions to interact with the commissions of other electronic communication network participants.
Participants can be banks, retail traders, hedge funds, and even other brokers. In essence, the participants conduct hedging transactions by providing the best buying and selling prices.
Electronic communication network brokers allow their clients to understand “depth of market”. Depth of market display is the buying and selling orders of other market participants. However, due to the nature of electronic communication networks, it is difficult to raise prices, so electronic communication network brokers usually get compensation through commissions.
Which type of broker should you choose?
It all depends on you! This type of broker is not necessarily better than that type, because it depends on which type of trader you are. You decide whether you want to choose a smaller spread, but you have to pay a commission, or choose a larger spread without receiving a commission.
Usually, intra-day traders and ultra-short-term arbitrage traders prefer small spreads because it is easier to obtain smaller profits because the market is more likely to offset transaction costs.
At the same time, for swing traders and position traders, a larger spread is irrelevant.
To make your decision easier, here is a brief summary of the differences between market makers, STP brokers, and STP + ECN brokers:
Brokers are not demons … most of them are not!
Unlike what you read elsewhere, forex brokers do not intend to eat you. They want to do business with you, not bankrupt you! Imagine that if you lose all your funds in a transaction, they will also lose customers. Of course, unless it’s a black broker who ran for one vote.
The ideal clients of a trading desk broker are those traders who balance their income. In other words, it is those traders who do not earn or lose money in the end.
In that way, the broker makes money from the customer’s transaction, and at the same time, the customer remains in the trading game and will not destroy the entire account. In essence, the broker hopes that their clients will come to conduct more transactions.