When it comes to trading forex, it’s important to understand the different types of brokerages that exist in the market. Two popular types of brokers are STP (Straight Through Processing) brokers and Market Maker brokers. In this article, we will discuss the differences between these two types of brokers and how they can impact your trading experience.
STP Brokers
STP brokers are known for providing direct access to the interbank market, which means that trades are executed without any dealing desk intervention. This allows for faster execution and tighter spreads, as there is no middleman involved in the process.
STP brokers typically make money by charging a small commission on each trade or by widening the spreads slightly. This transparent pricing model ensures that the broker’s interests are aligned with the trader’s, as they only make money when the trader makes money.
Market Maker Brokers
Market Maker brokers, on the other hand, create a market for their clients by taking the opposite side of their trades. This means that when a trader buys, the broker sells, and vice versa. Market Maker brokers make money through the spread, which is the difference between the buying and selling price of a currency pair.
One key advantage of Market Maker brokers is that they often offer fixed spreads, which can be beneficial for traders who prefer stability in their trading costs. However, there is a potential conflict of interest, as the broker may have an incentive to manipulate prices in order to profit from their clients’ losses.
Key Differences
The main difference between STP and Market Maker brokers lies in the way they handle trades. While STP brokers provide direct access to the market and offer tight spreads, Market Maker brokers act as the counterparty to their clients’ trades and may offer fixed spreads.
STP brokers are generally considered to be more transparent and reliable, as they do not have a vested interest in their clients’ losses. On the other hand, Market Maker brokers may be more convenient for traders who prefer stable spreads and are willing to accept the potential conflict of interest.
FAQs
Q: What is the interbank market?
A: The interbank market is a network of banks and financial institutions that trade currencies with each other. It is where forex prices are determined and where large volumes of currency are exchanged on a daily basis.
Q: How do I know if a broker is an STP or Market Maker broker?
A: Most brokers will disclose their business model on their website or in their terms and conditions. You can also ask the broker directly or look for reviews online to see what type of broker they are.
Q: Which type of broker is better for me?
A: The best type of broker for you will depend on your trading style and preferences. If you value transparency and direct market access, an STP broker may be more suitable. If you prefer fixed spreads and are willing to accept the potential conflict of interest, a Market Maker broker may be a better fit.
References
1. Investopedia – STP Definition
2. Investopedia – Market Maker Definition
3. Babypips – Differing Dealing Models in Forex
Are you ready to trade? Explore our Strategies here and start trading with us!