Difference Between Market Makers And STP Brokers In the forex market, there are three different types of brokers. They are the Market Makers, Straight Through Processing (STP) brokers and Electronic Communication Network (ECN) brokers. The aim of this article is to discuss the difference between Market Makers and STP brokers.
Market Makers provide liquidity to the clients or market. They trade against their clients as the counterparty, taking positions as well as risks on their own trading books. Market Makers maintain an inventory of the currency that they offer for trading. They have a dealing desk and they use their currency inventory to trade against their clients. They may also have their own liquidity providerswhich they can use at their discretion. Market Makers may act in one of the following ways when they receive an order:
- Sell from the inventory on receiving a buy order or buy to enhance the inventory on receiving a sell order.
- Match as well as execute orders with contra-side orders having the same volume and price as that offered by an ECN broker.
- Pass on the order to their liquidity provider adding or subtracting the spread either before or after market execution, depending on whether a buy or sell order is received as an STP broker does.
A Market Maker displays current ask/bid prices of currency pairs based on the market prices provided by liquidity providers and orders received from clients. Market Makers manipulate prices and never give real market price to their clients. Thus, Market Makers generate their revenue from spread and by taking the other side of clients positions.
Forex brokers who are not Market Maker are either STP brokers or ECN brokers. These brokers are also referred to as Non-Dealing Desk brokers. Their liquidity and pricing is usually sourced from multiple banks . They route orders of clients to the these liquidity sources usually through an aggregation system. Client orders are therefore dispersed among the banks which makes for a more efficent marketplace.
STP brokers will charge their clients either through an increase in the spread of the currency pair or they may charge a commison or transaction fee.
Summarizing It is important that if using a STP broker it should be one that offers deep liquidity and speed of ececution. This type of broker tends to offer a more level playing field in the world of forex trading.
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