STP Broker: Definition, Characteristics, and Advantages

Updated July 13, 2022 Latest Release

A Straight Through Processing (STP) broker is a forex brokerage firm that provides wholesale forex services orders to institutional traders. The STP broker was built from the exchange between the two world-choices of retail customer service and high-quality trading institutions.

These brokers must provide a full spectrum of professional staff for investment, analysis, marketing, and communications support, all under one roof. [1]

Let’s look at the different characteristics and advantages of an STP broker below.

What are the Characteristics of an STP Broker?

An STP broker typically offers multiple financial instruments, spreads, and sizes. The main characteristics of an STP broker include:

1. STP Brokers Passes a Client’s Trades

An STP broker will pass all or part of a client’s trades up to liquidity providers of an STP broker. STP brokers function as market makers because they keep certain transactions inside their own. As a result, it’s a hybrid between an STP broker and a market maker.

2. Access to Multiple Classes

Because STP brokers have access to a diversified spread and size offering, the customer can make more than one position. In addition, to accommodate this possibility of multiple classes being simultaneously created by individual clients or institutions, an STP broker offers single contract trading with quota-driven execution.

3. STP Brokers Trade on Behalf of Customers

STP brokers may trade against their customers. An STP broker can change against the customer’s risk position without their consent. This type of trading allows clients to take advantage of market opportunities that are not being provided by other firms and may save them money on transaction fees and an exchange fee for currency conversions.

4. The Majority of STP Brokers are Regarded as Honest

Throughout their daily operations, in terms of doing business and negotiating with clients, an STP broker manages these situations as a fiduciary.

5. STP Broker Compensation

Compensation for STP brokers usually comes from three different sources; proprietary trading income via automated trading systems that are part of liquidity providers such as robots (dynamic hedges), interest margin on purchased securities, or other derivatives used to generate the net spread between the bid and ask.

6. STP Accounts Have No Commission Fees Attached

An STP broker makes money from spreads rather than just capitalisation. An STP broker generates profit by selling and not covering when the stock price drops, especially if it breaks below a pre-defined level of support on the bid side/high on the ask side.

Suppose a buyer’s quote is higher than their offer. For example, there would be no need for active bids due to automated features trading between brokers or institutional orders according to their internal instructions (for buy only, sell up, etc.) [2]

Advantages of an STP Broker

1. There are Both Variable and Fixed Spreads

An STP broker offers both variable and fixed spreads to make trades. It can be added as either a discounted bid or an ask charge depending on when and how to use these spread amounts in making daily decisions. For example, underneath support levels are expected times where one may choose not to make bids generated by STP brokers, thus holding lower strip prices rather than trading at them.

2. In Comparison to Other Types of Brokers, an STP Broker has a Lower Risk

STP brokers are less risky than a market maker due to their float allocation (the number of shares available for table trading) vs. being in the physical trade space.

Their stock price is also not moveable; therefore, it can’t benefit from a volatile upward climb as well as potential significant losses when prices drop, like a floor trader may experience if they are liquidated and forced from an exchange’s order matching system because STP securities are inactive on the other side.

3. Clients’ Orders are Filled Quicker and More Accurately

An STP broker’s system is built with forward-thinking, so their TR4 order types (where all orders are grouped for the predetermined time) may be filled before other trades or even gone completely. This helps expand a client’s trade opportunities and supplements active bids compared to liquidity exchanges where this isn’t possible. The reason why different brokerages fill your order differently from each other can differ per trader. [3]

4. Clients Have the Ability to Search Around for a Better Quote

An STP broker’s automated price feeds offer far more search functions than traditional brokerage platforms. Unlike some exchanges that show the cheapest bid/offer, you can enter a variety of applicable criteria to find out which particular brokers have the best quote for your trade.

5. Live Market Trends

With an STP broker, it is possible to follow current market levels 24/7. On other platforms where some API feeds are public, traders may also encounter hidden trading activities within the system and take advantage of them.

6. Increased Liquidity for Front-Ends

STP brokers have lower float than several of their counterparts, so there would be more opportunities for trades in general compared to Interactive Brokers or even an alternative trading system (ATS) that charges more than $0.01/share. This is because STP brokers can get better prices. After all, they have access to order flow directly from the exchanges, so there is no need to pay a commission, which is usually the case with an ATS.

Additionally, an STP broker generally has better pricing because they are not paying a commission on every trade. They only pay when trading is profitable, and if they lose money, there is no charge at all.

Final Word

An STP broker has many advantages over other trading platforms, and the main advantage is that STP brokers can get better pricing when compared to an ATS or even IB. In addition, STP brokers do not have to pay commissions on every trade, except where trades are profitable. This is why many traders prefer STP brokers over other platforms.


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References

  1.  “Study on Investment Advisers and Broker-Dealers – SEC.gov.” 11 Jan. 2011, https://www.sec.gov/news/studies/2011/913studyfinal.pdf. Accessed 8 Apr. 2022.
  2.  “YADIX, Facts about STP Trading Advantages that all online Forex ….” 30 Apr. 2019, https://hercules.finance/facts-about-stp-trading-advantages-that-all-online-forex-traders-should-know/. Accessed 8 Apr. 2022.
  3.  “Avoid the Pitfalls of Desk Brokers and Trade with STP – Forex Bonuses.” https://www.forexbonuses.org/trading-methods/stp/. Accessed 8 Apr. 2022.

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