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How stp broker works?

The forex market is quite different from our other regular conventional stock market. It is therefore natural that the traders and brokers involved are also different. It is necessary for us to have an extensive and thorough understanding of the various brokers because the modus operandi of various brokers varies and so does the investment opportunities and spreads. Once we get an idea of what is that we require we can choose the broker accordingly to our needs and convenience.

Types

There are broadly 3 groups of traders:

• Market makers
• ECN
• STP

All of them have different strategies. We will concentrate on STP broker for the moment.

STP broker

STP is the short form for Straight through Processing. It's a process where, information is entered once and transferred from one party to another. Its advantage is that it reduces the settlement time and therefore the settlement risk.

An STP broker usually has his own quotes, which are different from the market quotes. The quotes of the STP broker can be set or unsettled where he can let it be at zero and wait for the best bid, the more the merrier, thus offering variable spread, depending upon his choice. The main advantage of using a STP broker is that it doesn't require a large amount of money like ECN. The spread and pips are workable and acceptable. So most newbie's into the forex market prefer to go the STP way as it doesn't require much investment.

How it works?

An STP broker usually functions in two ways:

Firstly he routes your order into the market and he makes a commission out of it. Secondly, he may only route the higher or successful orders into the market and keep back the lower and insignificant orders back thus making a hefty profit out for himself.

Thus, the STP broker makes a killing from successful transacted orders and rejects and re routes. This is the reason why, a STP broker never turns down even small scale deals as they are earning just by getting your quote through the market. Sometimes, the market is so much volatile so that by the time your quote reaches the broker, the market quote might have got changed. In these cases, the STP broker has got two options. First, he can reject and re route your quote or he can move your quote ahead, if he feels that the market is good and put the extra money in from his own pocket.

The pitfalls

The main disadvantage of the STP broker is that, you can never be sure if he is acting in your interest or against it. Remember, the brokers in Forex are traders themselves and the make money from the spreads and the pips.

One more thing to note in most of the Forex traders is that they use a combination of both ECN and STP techniques. Neither of them is used singly. It's quite murky water ahead and it requires a bit of common sense and balancing act to come out of it unscathed.