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Chapter 38, Part I. Some Talk About Brokers. Page 7

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Here is simple example how an STP broker makes money. Usually it has not just single larger counterparty but some number of them, let’s say three – 1 bank, 1 larger broker and some hedge fund. They give the broker their quotes. These quotes are subject to change, but our STP broker always can create some combined quote with tight spread, because it can trade freely and with no limitations with this liquidity providers. Once the STP has determined quotes best for itself - in our example this is 1.40/1.4001, it adds some more pips (for example, 1 pip) to widen the spread and transfers quotes to you. No matter what you will do buy or sell – STP broker always will get 1 pip profit, since his spread is tighter on both Buy as on Sell side. If he will give you 1.3998/1.4002 – then it could get even 2 pips if you intend to sell at 1.3998. By the way, that’s why most STP brokers have variable spread, that could change, especially when the market is shaken by news or some other important event – because STP quotes depend on some other quotes provider and the STP broker can’t guarantee they will be constant.


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    As a result, we can say that this kind of broker will give you different spreads among different brokers, should be intermediary between counterparties, quotes come from larger brokers or banks, which will be the counterparty of your trades; orders execution should be automatic without much re-quoting.

    Pipruit:
    Sir, I understand what a pure STP broker is and I like it. But since you’ve said that it could be something like STP + DD broker – is there any chance to find out how it will act?



    Commander in Pips: Well, in reality you will hardly be able to distinguish this. Many brokers most of the time apply some hybrid way. But here is one help to you. Most regulated UK and US brokers hardly will trade against you directly and obviously so that you will loose your money, skew quotes and so on - just because in this case they can get problems with their licenses. If you still like pure brokers, as they have to be – think about futures market – you will have no uncertainty what the broker is.
     
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