The online forex trading industry has a variety of acronyms and terminology that can often be confusing to newcomers, STP being one of them. Because forex & CFD trading is relatively new when compared to the stock market or futures, it’s challenging to find a reliable source of information that adequately explains market terminology such as Straight Through Processing also known as STP.
Chances are you stumbled upon us because you saw the term STP but weren’t exactly certain what this term was referring to. Maybe you came across the word STP on a broker website or in a forum but couldn’t understand the context. As you’ll soon discover, STP is not a very difficult concept to understand as you may have originally thought.
A Simple, Easy to Follow Definition of STP (Straight Through Processing) in the Forex Market
Let’s start with a basic definition of STP and then we’ll provide some examples in order to aid in your understanding. STP stands for Straight Through Processing. This term is most commonly used when discussing how a broker handles risk.
Before going further, you may wonder what we are referring to by the term risk? Let’s explore this term further and you’ll shortly see how it relates to STP. A major component to operating a forex brokerage is deciding how to handle order flow, or simply put the buy and sell orders that the broker receives throughout the day and night.
It’s important to note that when you decide to buy EUR/USD in your trading platform, your broker is in effect selling EUR/USD to you. How does this relate to STP? Well, a broker operating on an STP business model will simply pass along all of the orders received by its clients directly to their pricing provider, known as a liquidity provider.
How Are Orders Processed with STP Trading?
As previously mentioned, forex brokers are faced with a choice each time one of their clients decides to buy or sell a currency pair or CFD. An STP broker is simply going to take the order and pass it to their pricing provider.
Let’s consider an example. Imagine that you decide to buy 1 lot of EUR/USD in your trading account. After you click, you notice the order is filled in your trading platform. In the background, your broker received the request and placed the exact same trade, buy 1 lot EUR/USD, with their own pricing provider. In essence, if you buy EUR/USD in your account, your broker is also doing the same action at their liquidity provider. It’s as simple as that.
How do STP Forex Brokers Make Money?
The next question you may be asking is, how do STP brokers make a profit? After all, if the broker is just passing along your order, where is the money in that? It turns out that this can be quite a lucrative business.
A forex broker forms relationships with various liquidity providers, also known as LPs. These LPs offer premium spreads to the broker which will in turn mark up this spread to their clients. This spread difference, between the liquidity provider price and the broker is how money is earned.
For example, if a broker has a 1 pip spread mark up on EUR/USD with 100 clients, each trading EUR/USD 10 times a day (not an uncommon scenario), then the broker stands to earn roughly 1,000 pips each day!
Traders often prefer to work with STP brokers because they can be assured that no price manipulation is happening. In fact, there are a variety of regulatory jurisdictions in which licenses are granted soley to brokers who operate an STP business.
Let Us Help You Trade with a Reliable STP Forex Broker
If you are currently looking to trade with a reputable STP forex broker, we can help you out.
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