2.7 Straight-Through-Processing (STP) Brokers


Though the STP brokers have no dealing desk, they do have an interface between the trading client and the larger market – their liquidity providers. These are nominated banks, which trade on the interbank market, and to whom the STP broker directly passes his clients’ orders. 


STP stands for Straight Through Processing. An STP broker does is to fulfill the client's order with the best quotes from their various liquidity providers, while adding some markup on the spreads. Let’s say you are going to buy EUR/USD and the STP broker has 5 liquidity providers. Let’s assume that those 5 liquidity providers quote the following rates for EUR/USD:


Liquidity Provider Bid  Price to Pipette Level Ask  Price to Pipette Level
Liquidity Provider 1 1.26071 1.26091
Liquidity Provider 2 1.26073 1.26093
Liquidity Provider 3 1.26075 1.26095
Liquidity Provider 4 1.26080 1.26100
Liquidity Provider 5 1.26081 1.26101


The STP broker would filter out the best bid and ask foreign exchange rates and offer those rates to the traders with some markup as their profit.


In the above example the highest bid price i.e. your selling price is 1.26081 and the lowest ask or your buying price is 1.26091. Hence the filtered bid/ask = 1.26081/1.26091. These will be the prices which your broker's system will filter out. The second action the system will take is to add their markup. Let's assume that the broker's policy is to have 1 pip markup on either side i.e. bid and ask. Considering their trading platform will quote the bid/ask of 1.26071/1.26101. When you buy or sell, your STP broker will make 1 pip profit on either side. 


Please note that all the prices from different liquidity providers are differing on pipette levels, which is natural in a very competitive market like Forex. All these filtering of prices and markups are taken care of automatically, at the backend, by the preset rules and logics of the broker's trading platform. 


In very volatile markets e.g. during important economic data releases, the prices may change drastically within moments. Even though your orders get fulfilled almost instantly but during those fractions of seconds the prices may move against the broker. To mitigate against such risks, your STP broker may use variable markups and hence you may be trading with variable spreads. Another reason for variable spread is that the ask and bid rates may be coming from different liquidity providers, each point of time, and hence spreads may change from time to time.


The higher the number of liquidity providers in the STP’s system, the better the order execution for its clients. Because the liquidity providers are large entities that trade high volumes on the interbank market, it may be said that clients have access to the true market. This, and the fact that there is no dealer intervention, gives this kind of broker the name ‘Straight-Through’. 


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