When choosing a broker, it’s essential to understand the difference between various business models, such as STP (Straight Through Processing) and Market Makers. There’s a common misconception that STP brokers cannot be market makers, but this isn’t entirely true. While STP brokers typically route their clients’ orders directly to liquidity providers and do not take the opposite side of trades like market makers, it’s possible for a broker to employ both models, depending on the circumstances.

In this article, we’ll clarify the distinction between STP brokers and market makers, explore the potential overlap between the two, and explain why understanding this difference is important for traders.

What Is an STP Broker?

STP brokers use Straight Through Processing to route clients’ orders directly to liquidity providers (banks, other financial institutions, or liquidity pools) without any manual intervention. This means that when a trader places an order, it is immediately passed through to the market, without the broker taking the other side of the trade.

• No conflict of interest: Since STP brokers don’t act as counterparties to their clients’ trades, they have no vested interest in whether their clients win or lose. The broker simply earns a fee or commission for facilitating the trade, and the client’s trades are executed at the market price provided by liquidity providers.
• No requotes or manipulation: STP brokers are often seen as more transparent since they don’t have the ability to manipulate prices, requote orders, or widen spreads like market makers can. This provides an environment that is generally more favourable for traders who want to execute trades based on real-time market conditions.

What Is a Market Maker Broker?

A market maker broker, on the other hand, acts as the counterparty to the trader’s trade. This means that when a trader places an order, the broker takes the opposite position, either directly or by hedging the trade with a liquidity provider. Essentially, the market maker is providing liquidity by offering to buy or sell at certain prices.

• Fixed spreads: Market makers typically offer fixed spreads rather than variable ones, as they set the bid and ask prices themselves. This can make it easier for traders to predict their costs when entering and exiting trades, but it can also lead to wider spreads, especially during volatile market conditions.
• Profit from trader losses: Since the broker is taking the opposite side of the trade, they stand to profit if the trader loses. This can lead to concerns about potential conflicts of interest, though many regulated market makers ensure fair trading practices and transparency.

Can an STP Broker Be a Market Maker?

Technically, an STP broker cannot be a market maker, but the situation is more nuanced:

• Hybrid Brokers: Some brokers operate using a hybrid model, where they may function as a market maker for certain types of clients or trades, while acting as an STP broker for others. For example, a broker might route some orders directly to liquidity providers (STP) but act as the counterparty for others, such as small retail clients or specific account types, thus behaving as a market maker.
• Market-making capabilities for liquidity: Even though STP brokers do not take the other side of a client’s trades, some ECN (Electronic Communication Network) or STP brokers still act as market makers for certain products or under certain conditions. For instance, they may add liquidity to the market through liquidity providers or aggregate prices, which can still resemble market-making behaviour.

Example of a Hybrid Model:

• Example 1: A trader using a standard account with a broker may have their orders routed through the broker’s internal liquidity pool (market-making). However, a trader using an ECN or VIP account may have their orders passed directly to external liquidity providers (STP).
• Example 2: The broker may use a market-making model for smaller trades (e.g., retail clients) but route larger trades (e.g., institutional clients) to the market through STP or ECN execution.

Why Do Brokers Use Both Models?

Brokers often use both market-making and STP execution for different reasons:

• Profitability: Market-making allows brokers to capture spreads and profits from smaller trades, as they take the opposite side of clients’ positions. However, STP execution ensures that larger trades can be routed directly to the market, reducing risk for the broker.
• Liquidity management: Some brokers choose to act as market makers for clients who trade small volumes and therefore have less impact on overall market liquidity. This allows brokers to manage risk and maintain a more controlled trading environment. For larger or more sophisticated traders, brokers may prefer to use the STP model to pass trades to external liquidity providers.
• Regulatory considerations: In some jurisdictions, brokers may be required to follow certain practices for retail clients (such as market-making), while for institutional clients, STP execution may be mandated to avoid conflicts of interest.

Benefits and Drawbacks of STP and Market Maker Models

Each model has its advantages and disadvantages, and understanding these can help you choose the right broker for your trading style:

STP Model (Straight Through Processing)

• Advantages:
  • Transparency: Orders are passed directly to liquidity providers, making the execution more transparent and in line with market conditions.
  • No conflict of interest: The broker doesn’t take the other side of your trade, so they have no reason to manipulate prices or market conditions to their benefit.
  • Variable spreads: Spreads are generally tighter, as they are based on the liquidity available in the market.
• Disadvantages:
  • Variable spreads: While the spreads are generally tighter, they can widen during periods of low liquidity or market volatility.
  • Commissions: Some brokers charge a commission for executing trades, which can add to trading costs.
  • Liquidity issues: In some cases, STP brokers may still encounter liquidity issues, especially during volatile market conditions, which can result in slippage.

Market Maker Model

• Advantages:
  • Fixed spreads: Market makers offer fixed spreads, making it easier for traders to anticipate trading costs.
  • No slippage: As the broker is the counterparty, trades are typically executed with no slippage, and traders know exactly what price they are getting.
  • Control over execution: Brokers have more control over trade execution, which can ensure that retail traders get filled quickly during normal conditions.
• Disadvantages:
  • Conflict of interest: Since market makers take the opposite side of a trader’s position, there is an inherent conflict of interest. This can lead to concerns about price manipulation or requotes.
  • Wider spreads: Market makers generally offer wider spreads compared to ECN/STP brokers, especially during times of volatility.

How to Choose Between STP and Market Maker Brokers

The choice between an STP broker and a market maker depends on your trading style and preferences:

1. If you prefer lower spreads and transparent execution: An STP broker or an ECN broker may be more suited to your needs. These brokers provide direct access to the market and ensure that your trades are executed at market prices without manipulation.
2. If you prefer fixed spreads and a simpler trading experience: A market maker broker may be more appropriate. They offer fixed spreads and are ideal for traders who prefer predictability in trading costs, especially for smaller trades.
3. If you need access to professional services: Some brokers offer a hybrid model and cater to both retail and institutional clients. Professional traders may benefit from an STP model for large trades, while retail traders can still access market maker-style accounts for smaller trades.
4. Regulatory considerations: Ensure that the broker is regulated and transparent in their execution practices. A regulated broker, whether using an STP or market maker model, is more likely to provide a secure and trustworthy trading environment.

Conclusion

It is not true that STP brokers cannot be market makers. While STP brokers typically route orders directly to liquidity providers and do not take the other side of trades, some brokers use hybrid models that combine both market-making and STP execution depending on the account type or the size of the trade.

When choosing a broker, it is important to understand the broker’s execution model, spreads, and commissions, and to choose the one that best suits your trading strategy. Both STP and market maker brokers offer distinct advantages and can be trustworthy as long as the broker is regulated and transparent in their business practices.

To learn more about broker selection and how to improve your trading strategy, enrol in our expertly designed Trading Courses today.