Forex (FX) and Contracts For Difference (CFD) Straight Through Processing (STP) broker licenses require much less capital and this makes it a more affordable option for the broker.
Broker Review Contents
What does Straight Through Processing (STP) in Forex (FX) and Contracts For Difference (CFD) mean?
The name of the process is self-explanatory, but it essentially means that the broker passes your trades to external liquidity providers and doesn’t take the opposite side of your trade. This means that the broker only makes money from charging traders spread (the difference between the buy and sell price on the platform) and from swap fees (overnight holding fees).
The nature of this type of broker also explains why the capital requirement for a STP broker is lower than for a market maker (MM) one. The STP broker doesn’t trade against its clients and therefore doesn’t require as much capital.
Why do brokers Straight Through Process (STP) and not Market Make (MM)?
For some brokers obtaining a market maker (MM) license is tough as the capital requirements and regulatory work is much bigger. They also need to employ trading desk staff which can be expensive. Therefore a lot of brokers start with STP license and then once they manage to raise enough capital and have enough clients move towards the Market Maker (MM) model.
Other brokers simply don’t want to take on market risk and remain impartial. Doing only STP means that they can do marketing which focuses on integrity and no conflict of interest for traders.
Are Straight Through Processing (STP) brokers better?
They could be more attractive for experienced profitable traders, but as discussed in the Market Maker (MM) section, most market makers have the option to Straight Through Process (STP) as well.
Keep in mind that Straight Through Processing brokers work with liquidity providers and market maker (MM) because they pass your orders to them. This means that STP brokers can have arrangements with these providers for additional revenue, so the whole idea of 0 conflict of interest is at best disputable.
For a STP broker to be successful it needs to process big volumes in order to make money from spread, overnight holding costs and sometimes commissions.
Are there disadvantages to trading with Straight Through Processing (STP) broker?
They are limited to what their liquidity providers can offer. This could mean lower amount of symbols and markets.
It could also mean potential higher spreads, overnight costs and commissions because they base the prices which they offer on the ones which they receive from liquidity providers. In order for the STP broker to make money, it has to offer wider spreads than the one which it receives from the liquidity provider.
Your orders in the end most likely end up with a market maker anyway as most liquidity providers to STP brokers are market makers themselves. That being said, sometimes orders may reach the underlying market as well.
You can see a list of STP brokers