ECN: low spreads, direct trading for high-frequency traders. STP: Connects liquidity providers via brokers, suitable for everyday traders.
Different trading platforms offer many types of trading accounts, including low-spread accounts and standard-spread accounts. For most people, an ECN account usually represents a low-spread account, while a straight-through processing account (STP account) is designed to provide a fast, transparent, and low-cost forex trading experience. Beyond that, there are higher-level accounts, but in this article, we focus on these two types. To better understand these two account types, investors need to understand why the platform offers them. In fact, ECN and STP are not originally the names of accounts but rather the names of order processing modes. The platform can adopt different modes when processing orders, including ECN, STP, NDD, etc. The mainstream modes are STP and ECN.
An ECN account is a type of foreign exchange trading account; its full name is "Electronic Communication Network Account." It is a type of foreign exchange trading account, usually known for very low spreads (spreads). The main feature is the use of no market maker trading mode. The client's orders are passed directly to the trading market for matching with other traders.
STP accounts are straight-through processing accounts, and similar to ECN accounts, STP accounts also offer relatively low spreads, but their trading models are slightly different. It is characterized by the traders through the establishment of direct contact with the liquidity provider (LP), the customers orders directly to the liquidity providers trading system, and the automated way to execute and clear transactions, avoid human intervention and slip points, improve the execution speed and efficiency of transactions, while reducing transaction costs.
Main differences between STP accounts and ECNs
Trade execution method
STP Account: An STP account typically uses a broker as an intermediary to pass trade orders to the liquidity provider for execution. Brokers can choose which liquidity provider to send their orders to. STP accounts usually do not involve a trading table, so orders are usually executed immediately at market prices.
ECN Accounts: ECN accounts directly connect trading orders to the deep liquidity of the Forex market, allowing you to trade directly with other market participants, including other traders, banks, and institutional investors. This provides greater transparency and faster execution as orders are matched with market-depth information.
STP Accounts: STP accounts usually have a fixed or floating spread (the difference between the bid price and the ask price), which is the main source of profit for brokers. Spreads may be low, but they can be volatile at times.
ECN Accounts: ECN accounts usually offer very small spreads but usually require the payment of trading commissions, which are the main source of profit for Forex brokers. Spreads are generally more stable, while commission fees can vary.
STP Account: Liquidity for STP accounts usually comes from the brokers liquidity provider. Liquidity may vary depending on the brokers partner.
ECN Accounts: ECN accounts generally offer greater liquidity because they are connected to the liquidity pools of multiple liquidity providers and other traders. This means that better transaction prices and deeper market-depth information are often available.
Types of traders
STP Accounts: STP accounts are suitable for daily traders and medium- to long-term investors who seek relatively low costs and quick execution.
ECN Accounts: ECN accounts are suitable for high-frequency traders, day traders, and traders seeking greater liquidity and transparency.
STP Accounts: STP accounts usually use common trading platforms such as MetaTrader and are easier to use.
ECN Accounts: ECN accounts may require more advanced trading platforms and technologies to better take advantage of market depth and fast execution.
Factors to consider when choosing an STP account and an ECN account
It may be easier for newcomers to get started with STP accounts, as they often offer simpler trading conditions. Experienced traders may prefer ECN accounts as they offer more market transparency and lower spreads.
For day traders or for high-frequency trading, ECN accounts may be better suited as they typically offer faster execution and lower spreads.
ECN accounts typically require larger starting capital because they may involve paying commissions and have a higher risk, and STP accounts generally require less capital.
Trading styles can also influence choice, and if investors prefer to invest for the long term or escape market volatility, an STP account may be more appropriate. If you prefer short-term volatility and fast trading, an ECN account may be more suitable.
How to choose an STP account and an ECN account
When choosing a trading account, many people prefer to choose a low-spread account because it is usually more transparent. Investors can find this type of account on different trading platforms or need to meet a certain deposit threshold. But the low-spread account is not absolutely good or absolutely bad; it is just one of the options, and investors need to balance it according to their own needs and circumstances.
The STP model is actually a way for a platform to match customer orders with quotes from a bank or LP (liquidity provider) after obtaining them. This means that orders are matched quickly with banks, so execution is very fast. ECN accounts, on the other hand, use more internal matchmaking, that is, matchmaking within the platform. This means that when two traders open a position on the same trade pair, their orders are hedged against each other to ensure that the difference between floating gains and losses is minimal. As a result, ECN accounts typically have lower spreads because they do not involve the same costs as STP models.
Even ECN accounts can have slip-point issues, especially if the market is volatile or there are clear trends. Because most of the orders in the market are multiple orders rather than short orders, this may result in insufficient orders to hedge. This makes ECN accounts more prone to slippage in these situations and may even have a slower approach at times, resulting in missed opportunities.
In contrast, STP accounts typically have fewer slippage points when the market is volatile. There are pros and cons for investors to choosing different account types based on their individual trading style and needs. In the case of normal manual trading, the profit is mainly determined by the technology and the points caught and is less affected by the type of account.
|Feature||STP Account||ECN Account|
|Trading Execution||Orders transmitted to liquidity providers through brokers||Direct connection to the forex market's depth of liquidity|
|Trading Costs||Fixed or variable spreads||Small spreads + commission fees|
|Liquidity||Liquidity provided by broker's liquidity providers||Access to multiple liquidity providers and a pool of other traders' liquidity|
|Suitable Trader Types||Casual traders and medium-term investors||High-frequency traders and day traders|
|Technical Requirements||Common trading platforms like MetaTrader||Advanced trading platforms and technology|
|Trading Frequency||Typically regular trading frequency||High-frequency trading|
|Initial Capital||Relatively lower capital||Requires more substantial capital|
|Trading Style||Long-term investments or avoiding market volatility||Short-term volatility and quick trading|
The choice of account depends on the investor's trading style and preferences, and while ECN accounts may be more advantageous in terms of spreads, they are not suitable for every trading strategy. STP accounts are still preferred by many investors because they are easier to operate and do not have frequent slip-point issues. When choosing an account type, the most important thing is to consider your trading style and needs, rather than simply pursuing a low spread. Different account types are suitable for different situations, so make an informed choice based on your situation.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.