What is the difference between STP Forex Broker and Market Maker?

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3 weeks ago

In this article, we are going to analyze the main differences between the 2 main types of Forex brokers: STP and market maker. We hope that this article will help new brokers understand the main differences between each model and choose the best model for themselves.

STP Forex Broker

STP (Straight-Through-Processing) is used to show that the brokerage company sends all orders to the liquidity provider, so all transactions are executed without company intervention and at maximum speed. Among Forex traders, such companies that directly send trading orders to liquidity providers are also called A-book brokers. Such a model has a number of advantages, for example, it is easier for a Forex broker to carry out risk management, since he is not a counter party for clients and earns only from trading volume. Thus, it is beneficial for the company to let clients trade for as long as possible, which coincides with the goals of traders. This factor makes STP Forex brokers the most popular among retail traders.

Another advantage of this Forex broker model is the fact that the price of such a license is lower than that of a market maker and the regulation is not so strict. In recent years, this has played a special role, as more and more retail traders began to give preference to regulated Forex brokers. Offshore companies without a license are losing popularity.

Market maker

Unlike STP Forex broker, Market Maker is always a counter party for its clients and is obliged to pay profits to clients from its own funds – they earn from clients’ losses. Such companies are also called B-book brokers. Despite the fact that this approach involves a lot of risk, according to statistics, more than 95% of traders suffer losses, so the profitability of such brokers is higher than that of their STP competitors with equal trading volumes. It is also worth noting that such a brokerage business model requires additional risk management solutions to better control those who are trying to find weaknesses in the operation of the terminal and use it to their advantage. Thus, there are additional expenses for dealing and special software.

Another important factor to consider is the cost of obtaining a market maker license, especially when it comes to a reputable jurisdiction. Some countries require a huge equity capital (from 100 thousand to 1 million US dollars) + stricter and more thorough regulation, which also implies additional costs. However, more and more software is emerging to make these processes easier.

Moreover, there are mixed models of brokerage firms that submit only a part of client orders for A-book execution, while the rest is processed according to the B-book scheme. The mechanism for selecting trading orders is determined by the brokers themselves. As a result, customers do not even notice it. In addition, some forex brokers provide separate STP accounts, transactions on which are transferred directly to the interbank market.

Having analyzed the main differences, let’s summarize all of the above:

  • In recent years, clients prefer to trade with STP Forex brokers, but MMs can offer STP accounts or use a hybrid model;
  • STP licenses are a more affordable option for companies;
  • It is easier for STP brokers to carry out balanced risk management;
  • Market makers make money from the losses of their clients, while STP brokers make money from trading volume;
  • Often a market maker earns more than an STP broker.

 

The choice of model depends on your business plan and the amount of money you are willing to spend on a license, as well as the target audience. Having decided on these parameters, Nikol Consulting will be able to select the best option for you at the most favorable prices.