For Straight through processing:
Let's say, this is you, the trader in the image (right).
The broker will link my order to a liquidity provider like banks, hedge funds, and other brokers.
Basically, the broker will take my order, and route it to a liquidity provider.
How your broker will earn in this instance, is that they will mark up the spread.
So, let's say it's trading at a bid price of 100.070, and ask is 100.100 (Provider A).
What your broker will do is that they’re not going to give me a better spread as being offered on the liquidity providers.
What he will show on my screen is 100.090 Bid and 100.110 Ask.
You can see that the spread is higher than the original price.
What the broker will do is to mark up the spread.
In real life, they won't usually mark up too much, I'm just trying to give you an illustration.
You tend to have variable spreads when there is major news releases.
Because you know traders are taking away liquidity in the market.
Another thing about Straight through processing is that you're unlikely to trade in Nano lots.
So, it's unlikely that you can trade with Nano lots if you're going through Straight through processing broker.
Another one is what we call it Electronic communication network.
So, the difference between this and STP is that an Electronic communication network gives you direct interaction with the liquidity providers and other ECN participants.
Let's say this is you (left), and this is your broker (center).
The broker gives me the ability to trade within the other liquidity providers.
Instead of marking up the spread of my order, they typically charge a commission on your trades.
So, the ECN approach is where you can have a direct interaction with the other liquidity providers.
What type of Forex broker should I choose?
Should you go to the STP, ECN or market maker?
Well, here's my take on it…
For the market maker, otherwise known as dealing desk.
I would suggest new traders go for it.
Why new traders?
Because, for new traders, you want to be able to adopt proper risk management.
You want to be able to trade in Nano lots.
And only a market maker would offer you this privilege because they're simply not making a market for you.
As for Non-Dealing Desks, I would suggest this for day traders where you're trying to fight for every pip in the market.
Going for Non-Dealing Desk broker will give you better spreads.
So, going for a Non-Dealing Desk broker will charge you a commission every trade.
But you will be offered with the tightest spread possible.
Okay. So, with that said, let's do a quick recap...