What is STPSTP? StraightThrough Processing is short for StraightThrough Processing.
Technology in which a dealer, upon receipt of a customer order, offloads the customer order to a third party liquidity office.
However, most of the STPS discussed so far are usually associated with brokers that provide STP services. Some brokers have a dedicated STP broker, while others have a dedicated STP account.
Types of STP Generally speaking, there are two types of STP:1. After a trader places an order with a broker, the broker immediately executes the customer’s order and then places a liquidity order with a third party for hedging.
2. After the trader places an order at the broker, the broker places an order at the third-party liquidity office, and the third-party liquidity deals with the broker’s order and the broker deals with the trader’s order.
This STP mode is sometimes called DMA(Direct Market Access), Direct Market Access.
The main difference between the two is that even though the comparison between execution and market execution STP and STP/DMA is obvious, STP/DMA should be more transparent to traders.
In the case of market execution, STP/DMA orders go directly to a third party flow and are then given to traders based on the price given by the liquidity provider.
STP/DMA EARNS A SMALL PROFIT OR rebate from third PARTY LIQUIDITY.
In the case of immediate execution, the customer’s order will be executed by STP broker immediately, and then STP broker will hedge these orders at the liquidity provider to earn profits. If the trader’s order is not profitable enough, STP broker may re-quote.
However, in both STP and STP/DMA, the net position of the trader in the broker after the trade is completed is the same as the broker’s net position in the third party liquidity.
Advantages of STP Under the STP model, the profit model of brokers is only and commission.
For brokers, there is not much of a conflict of interest arising from client losses, even in the case of STP/DMA.
At the same time, in STP mode, since the net position is the same after the transaction is completed, the market risk of the broker will be greatly reduced.
Considerations for STP Brokers 1. Liquidity The most important consideration for STP brokers is the liquidity behind them.
We know that STP brokers are selling order mode,.
STP brokers earn only intermediate fees for either immediate or market execution.
Gains and losses on client trades are not related to the STP broker, but to the third-party liquidity (or liquidity of liquidity) behind the broker.
Therefore, whether the liquidity of the third party behind the broker is good or bad, often determines the performance of traders.
Each STP broker will have its own internal liquidity pool to connect different LPS. Although the number of LPS in this liquidity pool is much smaller than that of ECN, STP brokers will sign contracts with these LPS, and LPS will compete for orders from STP brokers by providing the best quotation.
Therefore, for STP brokers, usually the more LP, the deeper the liquidity pool.
Of course, this still depends on the LP you’re connected to.
Some LP may be better in Europe and the US, while others are other pairs.
If the STP broker has only one LP, then there will be no price competition, which is no different from adding another middleman to the transaction.
Brokers strive to own more than one LP to provide deeper liquidity, better quotes and, of course, lower point spreads.
2. Execution mode The problem of execution mode is also mentioned above.
Even if both brokers are STP models, it is clear that STP/DMA models are more transparent to traders. Conclusion: STP model is a good risk control method for brokers.
Having an STP channel avoids a lot of market risk.
Under the supervision of FCA, we usually set MatchedPrincipal as the dealer in STP mode. However, in the latest MiFIDII, we set a higher requirement for MatchedPrincipal.
The transaction initiated by the dealmaker between the buyer and the seller shall have the following three characteristics: 1.
The broker was never exposed to market risk throughout the execution of the trade.
2. Both parties shall execute it simultaneously.
3. In addition to commission, handling or transaction costs, the transaction ends at a price at which the maker does not incur a profit or loss.
