What is the reason brokers offer foreign exchange (FX) to their clients? The answer is simple: Forex trading boasts such straightforward steps that traders of any level, from novice to advanced, can engage in it successfully. It projects a multitude of benefits not just for traders, but also for brokers who offer it.
Thus, a new broker should factor in these variables when selecting their execution type. In this article, we will be providing a brief overview of all the options a new broker has when it comes to their choice of execution type. As your specialist brokerage consultant, we seek to provide you with all the relevant information you will need to make sound decisions for your brokerage.
Electronic Communication Network
An Electronic Communication Network (ECN) gives brokers a direct link to the interbank foreign exchange (forex) market, and provides access to a deep liquidity pool. This pool consists of a number of liquidity providers, much like multiple rivers merging into an ocean. Brokers get varying currency prices from the respective liquidity providers, and are thus at liberty to select the ones with the lowest spreads. It gets rid of the need for a dealing desk as traders have an automatic connection to the currency market and are getting direct market prices.
ECN is an automated system that matches buy and sell orders. It can be seen as a bridge connecting major brokerages and individual traders so they can trade directly between themselves without the need for middlemen. Order information and exchange rates are executed in real time, making it less susceptible to human error.
There are many attractive benefits of the ECN model. For example, there are almost no spreads and no risk of re-quotes. This is great for brokers looking to cater to their more inexperienced traders, who can still benefit during market volatility as a result of reaction to news events. A broker can give their clients the tightest spreads available, and in the event of high market volatility, these spreads can be widened, sometimes even pricing out a few traders.
The Straight-Through Processing (STP) model, or also commonly termed Agency or A-Book model, is a fully automated dealing system for a brokerage to send its clients’ orders through to the liquidity providers.
The STP model is similar to the ECN model in many ways. It automates all trades and removes the risk of human error, re-quotes and delays. Like ECN, there is also no dealing desk for STP as each trade is executed electronically to the liquidity providers. The differing factor between the two is that STP trades are forwarded directly to liquidity providers while ECN trades are executed via a liquidity pool consisting of members of the electronic network.
Traders benefit from an STP model through its deep liquidity pooled from a multitude of liquidity providers. There are tighter spreads and higher quote accuracy. In times of high volatility, spreads are typically variable and may increase. However, under normal circumstances, the STP broker will not be affected by these variable spreads—they will simply connect their clients to the liquidity providers and earn a commission, thereby preventing any conflict of interest with its clients.
This is one of the key differences between STP and ECN, where traders are charged a fixed commission for opening and closing trades and spreads.
With its reliable and unique STP model for forex, Broctagon Prime offers the most favourable trading conditions and deep liquidity that is second-to-none, giving clients unprecedented access to the interbank markets.
Unlike the first two models, a market maker has a dealing desk within the brokerage, where the broker acts as the counter-party to their clients’ trades. The term ‘market maker’ is derived because the firm is ‘making the market’ by quoting the bid and ask prices to its clients. A market maker broker can give traders fixed spreads, making their risk management much easier. In order to function with this model, a broker needs to have a much higher capital investment than that of an STP broker in order to fully cover its clients.
In the trading community, there is a lot of debate about certain pitfalls when trading with a market making broker. However, when you consider the capital requirement it can be said that the broker is more financially secure than an STP broker. A market maker takes on a bigger risk by keeping the client trades ‘in-house’, showing that there is a much lower risk of going bankrupt and losing all of its clients’ funds. Should the market maker choose to hedge its risk, it can open up its options and utilize a liquidity provider. They can elect what is known as a hybrid model—a combination of market maker and A-book execution models. This unique execution model is offered by Broctagon Prime as well.
The execution type chosen is fundamentally crucial to your brokerage’s business model and success. As your turnkey liquidity solutions provider, Broctagon Prime offers you a wealth of choices that are tailor-made to suit your business needs, each aimed at allowing your brokerage to reach its utmost potential.
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