Academy News How FX brokers work - behind the scenes of order execution

How FX brokers work - behind the scenes of order execution

The way a broker handles its clients' orders is influenced by its infrastructure model. There are several models, but among the most well-known is the distinction between STP (straight through processing) and MM (market maker). What are the basic differences between these models and why it is something traders should be interested in, will be explained in this article by our CEO, David Varga.

Read the interview

Differences between STP and MM brokers

It should be noted that brokers use different infrastructure configurations to execute transactions. Sometimes, brokers are also divided into dealing-desk brokers and no-dealing-desk brokers.

STP brokers

Act as an intermediary in transactions with their clients. The principle is simple: our server receives the client's order and then transfers it to the liquidity provider. The operation is performed in milliseconds. The broker's profit in each transaction consists of a commission or a spread, which is the result of a margin added to the base spread.

Market Maker (MM)

MMs have their own liquidity and provide it to their clients, acting as the only counterparty to their orders. Transactions thus take place in the so-called internal book. Market makers often also exist on the basis of so-called hybrid models. In these, the broker transfers part of its clients' transactions to liquidity providers. The MM broker may thus have an incentive to "get rid" of its profitable clients by sending their orders to an external entity.

For STP brokers, much also depends on the type of liquidity provider they use.

The first type of liquidity provider may be another broker or a bank executing transactions as a Market Maker.
Second, some liquidity providers may also operate like an exchange (officially known as an MTF or Multilateral Trading Facility), bringing together market participants in the form of a trading exchange.
And third, a liquidity provider may be a Prime Broker or Brokerage. In this model, liquidity providers collect prices from the interbank market, combining the liquidity of many different financial institutions. This allows them to choose the best possible price - an option rarely available to retail brokers. Although Purple Trading has experience with all three of these models, we use the second and third types of liquidity brokers.

Despite not being the cheapest, they guarantee peace of mind and a lack of common technical problems.

Market Maker (MM) brokers provide their own liquidity and are the only counterparty to clients' orders. Transactions are then settled within the so-called internal book. There are also hybrid models in which the broker transfers part of the clients' transactions to the liquidity provider. This type of broker tries to "get rid of" profitable investors by sending their orders to an external entity. So if you happen to make money, the broker probably has its eye on you!

Although I have my doubts, I think it is possible to find an honest MM broker; but unfortunately, honesty is often difficult to prove before the event. MM brokers have access to certain tools that allow for increased slippage, can set minimum stop loss level intervals, or interfere with client transactions in many other ways.

David Varga

Co-founder and Executive Director

The question of whether you can find a reliable MM broker is quite a hard one to answer. From my position as the CEO and co-founder of Purple Trading, I believe that such brokers exist. However, proving one's transparency and purity of intent before a misstep occurs is often impossible.

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How do we know which model the broker uses?

Statistics

There are several ways of identifying the model used by the broker. STP brokers tend to publish a list of liquidity providers and execution statistics on their website, such as average spreads, execution time and slippage distribution - which you can also find on our website. MM brokers are usually not as transparent about their activities.
Licensing

You can also check what license the entity holds: if the broker does not have a "dealing on own account" license, it means it is not a Market Maker. In the case of Purple Trading, the CySEC regulator's website states that we are only licensed to "accept and transmit orders", "execute" and "manage portfolios".
Regulations

The final check is the MiFID II regulation, according to which investment firms in the European Union must disclose information on the execution of client orders - under the RTS28 report. A simple check shows that last year, Purple Trading used four different liquidity providers. In the case of Purple Trading, you can find all the above-mentioned legal documents on our website.

Who to choose

There is no one good choice for everyone. The STP is possibly the best choice, however, a solid Market Maker could be a good idea for some investors. MM brokers can offer you low costs, fixed spreads, and swap-free accounts. However, investors must bear in mind that this perfect situation will end when they start making money. Therefore, if you are serious about trading and are looking for a long-term partner to provide you with the best service on the market, choose an STP broker. As STP brokers, we are unable to compete with MM brokers in terms of spreads, etc. But if you are looking for a professional, reliable, and transparent broker who is focused on the safety of clients’ funds, Purple Trading is right for you.

As a broker based on a pure STP model, we can offer you the following conditions

STP account commissions

No commission per traded volume
Spreads from 1,3
Suitable for position traders

You can choose an STP account when creating a trading account in your Purple Zone.

ECN account commissions

Comission per lot*
Spreads from 0.3
Suitable for intraday traders

Spreads directly from our liquidity providers + direct access to the interbank market. You will receive the standard ECN account automatically once you have opened a real account with us.

^{* This commission differs according to the acquired status of trader, see the table below.}

Instrument	ECN spreadS FROM	MINIMUM POSITION SIZE	positive slippage	MAXIMUM LEVERAGE
a a EURUSD	0.3	0.01 lot	Yes	1:30 and 1:500 1:30 Retail clients 1:500 Professional clients
a a GBPUSD	0.3	0.01 lot	Yes	1:30 and 1:500 1:30 Retail clients 1:500 Professional clients
a a USDCHF	0.5	0.01 lot	Yes	1:30 and 1:500 1:30 Retail clients 1:500 Professional clients
a a GBPJPY	0.5	0.01 lot	Yes	1:30 and 1:500 1:30 Retail clients 1:500 Professional clients
a a XAUUSD (Gold)	0.07	0.01 lot	Yes	1:20 and 1:100 1:20 Retail clients 1:100 Professional clients
a DAX (Index DE40)	0.6	0.01 lot	Yes	1:20 and 1:50 1:20 Retail clients 1:50 Professional clients
a SP (Index S&P500)	0.3	0.01 lot	Yes	1:20 and 1:50 1:20 Retail clients 1:50 Professional clients
a CL (Oil WTI) Lowest spread on the market + Zero commission	0.03	0.01 lot	Yes	1:10 and 1:20 1:10 Retail clients 1:20 Professional clients
a BTCUSD	3.29	0.01 lot	Yes	1:1 a 1:1 1:1 Retail clients 1:1 Professional clients

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How FX brokers work - behind the scenes of order execution

Differences between STP and MM brokers

STP brokers

Market Maker (MM)

For STP brokers, much also depends on the type of liquidity provider they use.

Despite not being the cheapest, they guarantee peace of mind and a lack of common technical problems.

Boost your trading knowledge with Purple Academy!

How do we know which model the broker uses?

Statistics

Licensing

Regulations

Who to choose

As a broker based on a pure STP model, we can offer you the following conditions

Open an account and trade with us!

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