Two Types of CFD Brokers
Straight Through Processing CFD Brokers and Electronic Communications Network CFD Brokers
STP or Straight Through Processing, is the name given to brokers which, when upon receiving a client trade order they will pass on the cfd orders directly to their cfd trading liquidity provider. CFD Trading Liquidity providers can include Banks & as such there is no intermediary involved in order processing in other words the STP doesn't filter the cfd orders through a Dealing Desk. The absence of a Dealing Desk intervention is what makes this electronic trading platform a Straight Through Processing.
With the absence of an intermediary process (dealing desk) the STP, Straight Through Process execution will be able to process its clients orders instantly without any delay. This makes STP brokers the most recommended CFD broker type. Straight Through Processing CFD Brokers will also not send re-quotes to its clients something that most traders regard as very important. The Straight Through Process execution model will also in effect allow clients of the STP broker to trade during the release of economic news without any restrictions.
Straight Through Processingcfd brokers benefit from having several liquidity providers and this increased number of liquidity providers in their system means better order fills for the client. A large number of STP cfd brokers will use banks trading on the interbank market as their liquidity providers.
Before Reading Spot the difference between these 2 headings so that the 2 headings below don't seem like a repetition.
- Reasons why CFD Brokers choose Straight Through Process execution - STP Execution Model
- Reasons why CFD Traders Choose Straight Through Process execution - STP Execution Model
Why CFDs Brokers Choose STP Execution Model
In addition to the fact that most traders prefer STP cfd brokers due to the fact that a client's losses are not a cfd brokers profit. It is therefore in CFD broker 's interest for the client to make profit when trading, STP execution often implies that there is No Dealing Desk (NDD) and subsequently the broker has less expenses through its staff salaries.
An STP CFD Broker is compensated through a markup on the cfd trading spread it obtains from its liquidity providers and/or commissions imposed for each trade. As most liquidity providers of STP cfd brokers are banks on the Interbank market, the majority of which offer fixed spreads this allows the STP Brokers to provide both fixed and/or variable spreads to its clients.
Each time a client trades through the STP platform, the STP broker will always make a profit. As STP brokers add a small markup to the spread they receive from their liquidity provider when getting quotes of bid/ask rate. The STP CFD Broker will apply this markup by a certain amount of fractional pips to the bid and ask cfd price that it receives from its best bid/ask liquidity provider before passing the rates onto the client through their STP electronic platform.
As the client places an order through the STP platform, the cfd orders are then sent directly to the liquidity provider and as such the STP broker executes the same orders as the client at a slightly better cfd price which is the markup.
Why CFD Traders Choose STP Brokers
CFD traders often choose to execute their cfds trades through an STP broker as it often implies there is no Dealing Desk, which in turn means that the STP cfd broker is more transparent with clients.
The CFD traders enter trades into a true market instead of an artificial market that may be created by a market maker cfds trading broker. Client cfds trades obtain better and faster fills through an STP execution model.
The better and faster fills are obtained directly from the many competitive cfd market bids and offers coming through the STP liquidity providers, which provide for more liquidity within the online cfd market and in turn this leads to lower execution cfd prices for the client.
Client cfd trade transactions with an STP broker means there is anonymity for client as there's no Dealing Desk monitoring the cfd trade orders coming in from each client. The cfd orders are instead executed automatically through the inter bank market net-work anonymously.
Another Type of CFD Broker is ECN Broker
What is an ECN CFD Broker?
Electronic Communications Network- ECN cfd broker provide cfd traders with real time cfd price data quotes straight from the network of banks that trade CFD- The Interbank Market. Since these ECN brokers offer real time cfd price data quotes from these interbank network via their own Electronic Communication Network - which connects directly to the Interbank network of banks, they are known as ECN technology cfd brokers, short form is ECN Brokers.
ECN cfd brokers will show the entire bid and ask offers currently available in the cfd market from banks. An ECN cfds broker will allow cfds traders to place their cfd orders straight through to the cfds market. The liquidity is not provided by the broker but by this inter-bank network of banks. This way cfd traders cfd trading through an Electronic Communication Net-work gets high liquidity and executes cfds trades very quickly and instantly without getting re-quoted.
