ECN stands for Electronic Communication Network and represents the successful solution in providing clients direct access to other market participants. It is based on the Financial Information Exchange Protocol the FIX Protocol. It enables brokerage to obtain needed liquidity from liquidity providers and on the other side to deliver orders for execution. Orders are executed automatically at the best available price. It charges a transparent fixed commission for every transaction made and has tighter spreads than standard brokers. ECN broker pairs market participants thus it cannot trade against the client. It also provides additional time for trading and anonymity. Clients range from small retail to big institutional, like banks. All ECN brokers have the same feed and all clients have equal access to the information. The drawback is the commissions charged per transaction that could be high.
Straight Through Processing or STP is a similar electronic trading system like ECN where orders are executed automatically linking market participants with the liquidity providers. No dealing desks are involved and no human intervention, avoiding conflicts of interest between traders and brokers. Thus, all positions are passed directly to liquidity providers, for example, banks. The broker usually has several of them making the liquidity pool deep enough. The difference between the STP and ECN is in the form of client’ s charges. In the case of STP broker earns a profit every time position is opened as it put a markup on the spread it charges. There are many advantages of using STP rather than traditional dealing desk brokerage. There is a higher possibility of experiencing re-quotes and slippages from market maker brokers during times of low liquidity in the markets. Sometimes, dealing desk brokers need more time to fill orders, even several minutes. On the contrary, large liquidity pool enables STP accounts to reduce re-quotes and order executions are much faster.
Dealing Desk or market maker either pass the orders to other clients or enter as a counterparty in a trade which is the main difference from ECN or STP types. Here client’s losses are revenues for dealers. Quotes are artificial hence the name market maker, thus clients don’t get the real market rates. As counterparties in a trade, dealing desk brokers could have a conflict of interest with their clients. A lot of cases of scam and dishonest broker practices were recorded. The market maker could manipulate prices, disconnect the price feeds, fill orders at unfavourable price levels. DDs don’t charge commissions, they rely on marking up the price instead and earn from bid/ask spreads.