This is what you need to know when choosing your online brokerWhen choosing your online broker it´s important that you are aware of the different business models that brokers apply. Many brokers are upfront with their model but some are not, let´s start off with some basic terminology that you need to understand when comparing different brokers online:
- ECN - Electronic Communications Network. The ECN is an electronic system where buyers and sellers come together to execute trades. The network matches buy and sell orders currently and when specific order information is not available, it provides prices reflecting the highest bid and lowest ask listed on the open market.
- Market Maker / Dealing Desk
A market doesn’t reflect the "real" market directly but simply quotes similar prices to what the market displays. Any order you enter is processed internally at the market maker and never goes out to the market. Basically, any profit you generate goes out of the broker’s pocket and every loss ends up as a win for the broker.
- An STP broker typically sends all or some of the orders through to the bank. Basically, an STP Broker is a kind of hybrid between the ECN and Market Maker. It´s not uncommon that a broker that calls themselves STP actually market makes the unprofitable clients and let the profitable traders go straight to the bank since they do not want to take the risk of dealing with a winning strategy.