When talking about brokerage types, many go to the asset group the brokerage specializes in. As such, you might get recommendations to go with Forex brokers or perhaps crypto brokers. However, those aren’t variations in the true meaning of the word, but rather orientations. If you hear an expert talking about types, you’ll usually run into terms such as dealing desk (DD) and no dealing desk (NDD).
That’s because a brokerage’s true nature is determined by whether it processes clients’ orders through a dealing desk. But what does that mean exactly?
If a brokerage operates with a dealing desk, they’re the ones that create the market for you. The broker is the primary liquidity source for the trader and usually takes the opposite position. As such, DD brokerages don’t need to provide the exact interbank rates and instead set their own bid and ask prices. The intense competition, however, ensures that the prices are relatively similar. DD brokerages, also called market makers, have fallen out of favor slightly, as many consider their core operating methods to be laced with conflicts of interest.
On the other hand, we have brokerages that directly connect you to the market, named no dealing desk (NDD) brokers. NDD brokerages are a simple middleman between you and the market. They process your orders by matching them in an internal liquidity pool. If there are no matching ones, they forward your order to an external pool that includes banks, hedge funds, other brokers, and so on.
So, the first brokerage group profits when you lose, and the second earns via spreads, fees, or other methods. The main point is, you don’t have to lose for NDD brokers to gain, which clears up many issues.
Now we’ve finally reached the part where we talk about STP brokerages, but to understand those, you also need to learn about their sister type, ECN brokers.
Electronic Communication Network Brokerages are slightly more hands-on with their approach, operating via a complex network, as their name would suggest. They link various market participants together, starting from the bottom level with traders, and ending with banks, hedge funds, and such. That allows the participants to trade with each other directly, while the broker takes a small cut to stay afloat. Because of their nature, many call them the true NDD brokerage type.
On the other hand, we have Straight to Processing brokerages, which shoot your order forward toward external liquidity providers. Those external providers access the interbank market and thus determine prices. The brokerage will then attach their spread and finalize your trade by adding it to the external cost.
So functionally, the two types are inherently different, but realistically, online traders won’t notice that. The main practical distinction is that ECN brokerages or accounts often carry fees, while STP replaces those with increased spreads. While there are those that prefer either method, many claim that STP accounts are superior. That’s because fees present direct losses and make specific tactics unviable, while spreads don’t necessarily do so, although they are also unwelcome.
STP Brokerage Advantages
Going past the most basic advantage of being normally fee-free, and devoid of conflicts of interest, STP brokerages have many other upsides. Because of these, many experts argue that online trading success is achievable exclusively through STP brokers. Let’s take a look at what sets those brokerages apart and why they’ve earned so much favor.
No Limits To How You Trade
For ages, traders have been leading an argument that they’ll probably never resolve. The disagreement revolves around the best tactic to navigate the markets, possibly one that’ll let you always end up in the green. While the second part of that statement seems nigh-impossible, the first definitely prompts heated debates.
If you’ve ever tried to research a tactic, you might’ve been overwhelmed by the amount of different, often conflicting opinions. It seems as if each trader has their own spin on how to profit. That’s entirely normal since trading isn’t an exact science. However, with the plethora of different options, it’s vital to be able to execute your plan.
Many non-STP brokers limit specific trading strategies, often citing those as grounds for account termination. Scalping, for example, is one of the most commonly banned tactics. With STP brokerages, you have the insurance of the ability to execute your plan, whatever it may be.
As traders connect directly with liquidity providers when dealing with STP brokerages, their identity remains anonymous. That leads to a whole host of advantages, with the primary one being better pricing. However, it also leads to quicker execution times, as well as higher liquidity.
Two trading tactics that benefit from that more than others are, once again, scalpers, but also news traders. For the former, slippage and requotes get eliminated, leading to much higher plan execution capabilities. Things are slightly more nuanced for the latter, as they apply to a specific scenario where specific events cause exposure levels to soar. In that case, a market maker might refuse their client a trade when there’s no such risk with STP brokerages.
Because there’s no intermediary the process has to go through, the entire thing runs faster. As such, execution can reach near-instant speeds, leading to a more transparent trading process. Additionally, since STP brokers reference many liquidity providers, any issues with being able to liquidate your trades should be gone.
While it may not seem like a huge deal, the increased speed, along with the other advantages, create an entirely skill-dependant experience. For experienced traders, success should be a matter of careful analysis and price decisions, with minimal outside factor impact. STP brokerages allow for that with their transparent processing and lack of meddling. That’s why many experts consider finding an adequate STP broker an essential first step to online trading success.
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