What is STP (Straight Through Processing)?
While trading on the Forex, you have certainly read or heard of the term STP. But what exactly does this term mean? This article responds to this query with a detailed explanation of the term STP.
Before looking at the term STP more closely, we should first look at the definition from the brokers. In some ways, a broker represents an institution which forms the link between the trader and the foreign exchange market. The brokers make it possible for individuals to speculate in the foreign exchange market. Of course, these organizations are paid through part of a client’s initial investment. This amount generally corresponds to only a few pips and of course it varies from one broker to another. This is what is called a spread. In all cases, whether a transaction makes a profit or a loss, the broker systematically takes a commission.
It is this operational mode that is associated to the broker’s remuneration that is called STP, or ‘Straight Through Processing’.
Unfortunately, the recent Forex current events showed us that brokers are not all as honest as we could wish so this process is not always followed to the letter.
Indeed, as brokers, these intermediaries are themselves highly qualified when it comes to trading, and the less scrupulous of them exploit these abilities in order to pocket as much as possible.
There are several methods for that. The most widespread consists of playing against the customer. That is to say, to not really invest a trader’s stake in a trade that it knows by experience is lost in advance. By doing so, the broker pockets not only the spread, but also the amount of money invested by the customer. This is what is called a “hedge”.
The STP is therefore a process that is aimed at controlling this type of embezzlement. The principle requires the broker to take only the spread and nothing else while passing on the brokers orders in a systematic manner.
Although nowadays, the majority of brokers indicate their adherence to the STP in their communications, this regulation places them in a delicate situation against the competition. A broker who carefully respects this charter will be able to benefit only from its customers spreads. However, to accomplish ethical profits, it will have to favor the major transactions because the pip value depends mainly on the number of units traded. Another solution that is easier to implement is to charge the larger spreads. However, the increase in the number of online trading platforms is constant, competition is intense and the most popular brokers with the traders are those which offer lower fees on the transactions.
This incompatibility is currently causing great upheaval in the Forex world. In these circumstances how is it possible to combine profitability and honesty?
So it is essential that when you encounter a broker that offers very low spreads you verify if they respect the STP standard.