STP Broker: Definition, Characteristics, and Advantages

A Straight Through Processing (STP) broker is a forex brokerage firm that provides wholesale forex services and orders to institutional traders. The STP broker was built from the exchange between the two worlds of retail customer service and high-quality trading institutions.

These brokers must provide a full spectrum of professional staff for investment, analysis, marketing, and communications support, all under one roof. ^[1]

Let’s look at the different characteristics and advantages of an STP broker below.

Key Points

• STP brokers automate trade execution, directly passing clients’ trades to liquidity providers, and can trade against customers, offering a mix of variable and fixed spreads without commission fees.
• They present a lower risk than market makers, as they do not benefit from price volatility and offer quicker, more accurate order fulfillment, with advanced search functions for better quotes.
• With STP brokerage, clients benefit from 24/7 live market data and increased liquidity, enabling more trading opportunities and potentially better pricing through direct access to exchange order flow.

What are the Characteristics of an STP Broker?

An STP broker typically offers multiple financial instruments, spreads, and sizes. The main characteristics of an STP broker include:

1. STP Brokers Pass a Client’s Trades

An STP broker will pass all or part of a client’s trades to liquidity providers of an STP broker. STP brokers function as market makers because they keep certain transactions within their own books. As a result, it’s a hybrid between an STP broker and a market maker.

2. Access to Multiple Classes

Because STP brokers have access to a diversified spread and size offering, the customer can make more than one position. In addition, to accommodate the possibility of multiple classes being created simultaneously by individual clients or institutions, an STP broker offers single-contract trading with quota-driven execution.

3. STP Brokers Trade on Behalf of Customers

STP brokers may trade against their customers. An STP broker can change the customer’s risk position without the customer’s consent. This type of trading allows clients to take advantage of market opportunities that are not being provided by other firms and may save them money on transaction fees and exchange fees for currency conversions.

4. The Majority of STP Brokers are Regarded as Honest

Throughout their daily operations, including business dealings and client negotiations, an STP broker manages these situations as a fiduciary.

5. STP Broker Compensation

Compensation for STP brokers usually comes from three sources: proprietary trading income from automated trading systems that are part of liquidity providers, such as robots (dynamic hedges); interest margin on purchased securities; or other derivatives used to generate the net spread between the bid and ask.

6. STP Accounts Have No Commission Fees Attached

An STP broker makes money from spreads rather than just capitalisation. An STP broker generates profit by selling and not covering when the stock price drops, especially if it breaks below a pre-defined level of support on the bid side/high on the ask side.

Suppose a buyer’s quote is higher than their offer. For example, there would be no need for active bids due to automated features trading between brokers or institutional orders according to their internal instructions (for buy only, sell up, etc.) ^[2]

Advantages of an STP Broker

1. There are Both Variable and Fixed Spreads

An STP broker offers both variable and fixed spreads to make trades. It can be added as either a discounted bid or an ask charge, depending on when and how these spread amounts are used in making daily decisions. For example, underneath support levels are expected times when one may choose not to make bids generated by STP brokers, thus holding lower strip prices rather than trading at them.

2. In Comparison to Other Types of Brokers, an STP Broker has a Lower Risk

STP brokers are less risky than a market maker due to their float allocation (the number of shares available for table trading) vs. being in the physical trade space.

Their stock price is also not movable; therefore, it can’t benefit from a volatile upward climb or from potential significant losses when prices drop, as a floor trader may experience if they are liquidated and forced from an exchange’s order-matching system because STP securities are inactive on the other side.

 3. Clients’ Orders are Filled Quicker and More Accurately

An STP broker’s system is built with forward-thinking in mind, so their TR4 order types (where all orders are grouped for a predetermined time) may be filled before other trades or even be completely gone. This helps expand a client’s trading opportunities and complements active bids, unlike on liquidity exchanges, where this isn’t possible. The reason why different brokerages fill your order differently from each other can differ per trader. ^[3]

4. Clients Have the Ability to Search Around for a Better Quote

An STP broker’s automated price feeds offer far more search functions than traditional brokerage platforms. Unlike some exchanges that show the cheapest bid/offer, you can enter a variety of applicable criteria to find out which particular brokers have the best quote for your trade.

5. Live Market Trends

With an STP broker, it is possible to follow current market levels 24/7. On other platforms where some API feeds are public, traders may also encounter hidden trading activities within the system and take advantage of them.

6. Increased Liquidity for Front-Ends

STP brokers have lower float than several of their counterparts, so there would be more opportunities for trades in general compared to Interactive Brokers or even an alternative trading system (ATS) that charges more than $0.01/share. This is because STP brokers can get better prices. After all, they can access order flow directly from exchanges, so there is no need to pay a commission, unlike with an ATS.

Additionally, an STP broker generally offers better pricing because they do not pay a commission on every trade. They only pay when trading is profitable, and if they lose money, there is no charge at all.

Final Word

An STP broker has many advantages over other trading platforms, and the main one is that it can access better pricing than an ATS or even an IB. In addition, STP brokers do not have to pay commissions on every trade, except on profitable trades. This is why many traders prefer STP brokers over other platforms.

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