What is an STP Brokerage?

Many of you who are new to Forex may have heard that trading with a STP brokerage is often better than trading with brokerages which operate using the Dealing Desk model. But what exactly does it mean to be an STP broker and why are STP brokers considered superior than brokerages that operate a Dealing Desk? Today we are going to provide an explanation of what an STP broker is and how they differ from brokerages which operate a Dealing Desk. We will also explain some of the benefits of opting for a STP brokerage.

What is an STP Brokerage?

STP stands for Straight-through-processing and refers to specific type of execution. When a trader places a trade with a brokerage which operates using such a model, there trade is processed straight through to a liquidity provider. What this means is that the brokerage doesn’t take the other side of your trade and simply matches you up with a liquidity provider. The STP model is often contrasted with the Dealing Desk model, where a brokerage may hedge or simply take the other side of a customer’s trade. This can often mean that the profits made by a Dealing Desk broker are equal to the loses made by the client. 

STP brokerages avoid this conflict of interest, by placing the clients orders with other institutions and liquidity providers. In fact when trading with a brokerage which operates as a STP brokerage, it is in the brokerages interest for clients to make money. This is due to the fact that STP brokerages make money by charging commission or marking up the spread, which means the more volume a client can trade the greater the potential profits for the broker. It is for this reason why the majority of retail Forex traders favour retail brokerages. 

Hybrid STP Brokerages

Not all brokerages which claim to operate a Straight-through-processing (STP) model do so for all of their trades. Brokerages which do this are often referred to as operating hybrid model placing some trades with their liquidity providers while often keeping the smaller trades on their books. This can mean that some of your smaller trades will see the brokerage operating as the counter party, while your larger trades will be passed onto the firm’s liquidity providers. This can often be due to some liquidity providers being willing only to take on trades of a certain size, but is sometimes a conscious choice made by the brokerage. While hybrid models are often seen as superior to Dealing Desk execution, it is generally agreed that such an execution model is inferior to a pure STP model.

What to takeaway

STP stands for Straigh-through-processing and is an execution model which sees a brokerage pass trades through to one of their liquidity providers. Many traders prefer STP brokers over brokers which operate a dealing desk, as they feel the STP model removes any potential conflict of interest. Not all brokerages which advertise themselves as operating a STP model operate a true model with some brokerages only passing on larger trades to liquidity providers while keeping smaller trades on their own books. Well known STP brokerages include names such as FXCM and FXPro.