The Difference of True and False ECN/STP Brokers

Since forex is introduced to the public, traders learn more and more every day. Few years ago, most traders would have no answer if you asked what ECN/STP was. Thanks to the Internet and the free information accessible to public through it, now most traders know how to choose a good broker and what a market maker and ECN/STP brokerage system is.

However, scams never stop cheating. Since most traders look for ECN/STP brokers to open an account with, many scam brokerages that were used to be market maker, call themselves ECN/STP now, just based on some small changes they have made in their systems. They are not true ECN/STP brokers. This is what you have to be aware of. So, what is the difference of a true and a false ECN/STP broker?

ECN stands for Electronic Communications Network. An ECN broker is the one that its platform is electronically connected to the network of international banks or liquidity providers. When you trade forex through such a platform, indeed you are communicating and trading with the real and true international currency market.

STP stands for Straight Through Processing. It means everything from placing the orders to closing them is done automatically and electrically without any manual intervention.

Does it mean that if a broker electronically and without any human intervention connects the platform you install on your computer to another organization called liquidity provider, it is an ECN/STP broker?

Technically speaking yes. It is an ECN/STP broker, because it routes your orders to a liquidity provider electronically and without any human intervention. But what if that so called “liquidity provider” is another market maker broker that belongs to the same company but with a different name or a sister company?

That is still an ECN/STP broker from the electronic and technological point of view. But it is a fake ECN/STP broker, because he routes your orders to another market maker broker that rips you off and shares the profit with him (the broker). Or, it routes your orders to a different system with a different name which indeed belongs to the same company. I mean they take your money from one pocket and put it in another pocket. In both cases, you are not trading with the real currency world. You are dealing with a market maker broker that wants you to lose.

Why do they do this?

They do it because they want to claim they are ECN/STP, not market maker. They proudly advertise it on their sites. As I mentioned, they are ECN/STP from the electronic point of view, but they are market maker indeed.

Who Is a True ECN/STP Broker?

A true ECN/STP broker is the one that its platform is connected to at least one trusted and well-known liquidity providing organization (like Bank of America, Goldman Sachs, JP Morgan, Citi Bank, Nomura, HSBC) that has nothing to do with brokerage firm and there is no relationship between them. The broker just routes your orders to the liquidity provider. The liquidity provider makes money through the spread and swap and the broker makes money through the commission they charge you. You pay the spread and swap to the liquidity provider, and the commission to the broker.

Nowadays, most true ECN/STP brokers are connected to several liquidity providers at the same time. When you want to place an order, the system automatically chooses the liquidity provider that is offering the best price, and your order will be routed to that liquidity provider. Therefore, your orders will be distributed among several liquidity providers and none of them will have any chance to know your account and go against you in case you make money. That provides the best possible service for you as a trader, and because liquidity providers compete with each other, they offer lower spread every day which is good for retail traders.

Some brokers are true ECN/STP brokers, but they increase the spread in addition to the commission they charge you. What they add to the spread is called markup. They are not allowed to do that, unless they let the clients know. However, many of them don’t inform the clients about this hidden fee and extra charge and when you ask them why the spread is too high, they answer that it is the market’s normal spread, which is a lie. So, even a true ECN/STP broker can cheat you too. Read this: 6 Ways Forex Brokers Cheat You.

So, when you want to choose a broker, make sure it is a true ECN/STP broker first. Also ask them if they charge markups or not. You have to ask them about this and ask for proofs. In case they refused to give you a good answer, don’t open an account with them.

Good luck :)

How to Classify a True ECN Broker

Forex is a very lucrative market and it is attracting people everyday who are eager to invest their hard earned money and make it big in short span of time.  

Due to it's high interest among public, new Forex brokers are appearing in the market continuously. 

There are countless number of Forex brokers in the trading world so choosing the right one is absolutely crucial to start your trading journey.

In my previous article, I have already stated the basic steps to choose a broker that would keep your trading safari less dreadful and help you achieve your goals without worrying about external factors. After getting useful comments from knowledgeable community members and gaining experience through research and trying out multiple brokers, I am confident that ECN brokers are way more suitable than Market Markers.

What is an ECN Broker ?

The word ECN is an abbreviation for Electronic Communications Network.

It provides a marketplace where people or organizations from different parts of the world gather to compete bid and offer against each other thus providing small spreads for traders.

It is always advisable to pick an ECN broker due to the fact that they will never trade against you like Market Makers.

Their main source of income is through "commission" so they absolutely don't care if your trades win or lose.

However, there are many brokers who claims to be an ECN broker to grab clients when they are actually not. This is a very serious cause of concern and We traders must initiate proper steps in identifying them.

This would not only help to eradicate scam brokers but will also improve your percentage of return in the long run. 

How to Identify True ECN Brokers ?

I have come across few terms that I would like to share with you all as often new traders get confused by these :-

A) True ECN 
B) ECN by Association 

C) Outright Bucketshop.

These are often used interchangeably by Forex Brokers and traders but if you know the real meaning, your life would become lot easier.

True ECN brokers offers a transparent platform where traders, banks, organizations can compete against each other by sending bids and offers. Traders get the best deal for their orders at that specified time.

ECN by Association acts as a Level 2 brokers that forms a bridge between traders and real marketplace or True ECN brokers. These types of brokers have their own in house platform and can manipulate your trades if they want.

Outright Bucketshop are simply thieves, scams who are out there to steal your money. I have only one word for you if you happen to be with them and that is "good luck" 

MODE OF IDENTIFICATION

- Most traders usually new and gullible ones never read the broker agreement that usually tells you if the broker is a True ECN or ECN by association. All regulated ECN brokers will state that as it is mandatory for them to disclose such information to their clients.

- True ECN brokers will have variable spreads. I'm sorry to tell you if any ECN broker promises to offer fixed spread then it's not a True ECN broker.

- Absolutely NO dealing Dealing Desk if it's an ECN broker. Usually Market Makers have Dealing Desk meaning they will trade against you. Tips : In order to find out if it's a dealing Desk broker open a demo account and a small real account. you will see the pip difference and how much the price varies during news.

- No restriction in setting the distance of Stop Loss or Take Profit. If a broker doesn't allow Scalpers or Day traders take your pick what would that broker be? Yes you're right. That's not an ECN broker.

- Check Forex brokers chart and your order chart. Do you see any difference any BID price? If there is no difference then bingo you're with an ECN broker.

- A True ECN broker always allow traders to place any lot of trades. You can absolutely trust me on this one. Tips : If you really want to find out if it's a True ECN broker, place a trade bigger than 5 standard lots. If the order gets rejected then it's not a True ECN broker.

- Usually True ECN brokers won't promise you big offers and discount while opening an account. Like I said before they would generate revenue through commission regardless of you win or lose your trades.

- True ECN brokers will display all pricing updates every minute as the prices are coming live from the market. Tips : Check the Platform and best would be to compare it with a demo platform as well.

All these tests can be done by anyone to distinguish a True ECN broker from a Fake ECN broker. 

So what does your ECN broker stand for? Electronic Communications Network or Electronic Con for Newbies ? 

If I have missed out on any point, feel free to add them and let me know as well. We can only make our trading journey beautiful by helping each other.

- If your Broker is giving you only negative slippages then it's not a True ECN broker. Slippage is an usual occurrence and that's pretty normal in a True ECN market. Slippage can be both positive as well as negative.

Cheers !

A Book and B Book Model

Let's face it, you can't start placing trades unless you have a BROKERAGE ACCOUNT.

In today's world we have more than thousands of brokers to choose from? Have you ever wondered is this the right broker for me ? or 

how well do I know the broker?

Choosing the right broker is no different than picking the right stocks or placing right trades that would ultimately give you profit and peace of mind at the end of the day.

We all want to win and succeed in life and it would be catastrophic to see our hard earned money sliding out of our pockets due to lack of common sense.

I strongly believe selecting the right broker should be the first step in FOREX TRADING JOURNEY. They are the ones who will be handling your money so why not waste some time in knowing your broker before you start building trading relationship with them.

BASIC THINGS TO CONSIDER : -

1. Regulated Forex brokers are always a safe bet.

2. Get an ECN broker -- There are mainly two types of brokers ECN And Market Markers. ECN brokers offers lowest spread than MM brokers however they do charge commission. I always prefer ECN broker as they usually never trade against clients.

3. Forex Broker with sufficient leverage.

4. Easy Withdrawal Policy.

5. Availability of Demo Accounts in order to test platform.

6. Account Types. (Variable as per Clients)

These are some of the basic guidelines that every new and professional trader should look for in any Forex Broker. But are these enough? Does it say everything about the broker ?

Well, guess what? That surely doesn't. You also have to know how your broker places your trades.

So, What exactly is A BOOK and B BOOK ?

Trading Forex market is not like trading equities or bonds because your broker can manipulate your trades if they want.

A BOOK:-

When broker transfers all your trades to liquidity providers or real market and matches with other buyers and sellers.

B BOOK:-

When broker holds your trades in the house and bets against all your trades. In other words, they don't send your trades to the real market to get better deal.

For example let's say you bought 10 lots of EUR/JPY at 140.00 so what would your broker do? Broker would sell 10 lots of EUR/JPY.

Wondering about who would win the trade?

Well, either party has equal chance of winning it but considering 95% of Forex traders lose money , you would lose the trade.

What's the benefit of B book for Brokers?

A BOOK REVENUE

Let's say a Broker has 100 clients with average deposit size of $1000 and Total deposit size of $ 100,000. Total trading monthly volume is 200 lots with commission around $ 7 to $ 8.

This would approximately generate a revenue of $ 4200 to$ 5600 for the broker considering there are 3 to 4 trades per day with a trade size of 0.1 lot per client.

We can roughly sum it up and make an average of $ 5000. So that's your broker revenue for the month from all clients.

Now, when your Broker B BOOK , most clients lose 10 to 15 percent of deposits within very first month and that would fetch your broker a revenue of $ 10,000 to $ 15,000 which is more than double if they choose A book

So It's not a rocket science why most brokers would prefer B BOOK style.

One thing we should note that bad trades that we place is not broker's fault . It's our fault. Brokers can just identify those bad traders and hold their trades to make money off them.

HOW THE IDENTIFY BAD TRADERS?

This is termed as hybrid model adopted by most brokerage firms in order to identify between winning traders and losing traders. They have specialized software to find that information.

Signs they look for to be considered as a BAD TRADER?

1. Maximization of leverage.

2. Risking more than 10 percent of Equity

3. Trades placed without Stop loss

4. Total deposit Size less than $ 10,000

These are the signs that software look for to identify a bad trader and tells a broker if the client is worth B Booking? Meaning they would not send their trades to real market and bet against them.

So how well do you know your Broker?

Thanks.