Let’s see how STP execution actually works.
A trade that is “A-Booked” is sometimes associated with being “STP’ed” or simply “STP”.
Forex brokers may use them interchangeably in their marketing, but they are NOT the same thing.
It’s important to distinguish between the two concepts.
Depending on whether your broker is an “A-Book broker” or an “STP broker”, your experience on how your order is executed will be different.
With an A-book broker, you will experience faster order execution and minimal slippage.
This is because the broker will execute your trade first, and then hedge.
Hence, why it’s known as “post-trade hedging”.
With an STP broker, you will experience slower order execution and a higher probability of slippage.
This is because the broker will make sure to “lock in” its matching order with the LP first.
And then execute your order.
Hence, why it’s known as “pre-trade hedging”.
When your broker executes an offsetting position with a counterparty PRIOR to executing your order, they know this as “straight-through processing” or “STP”.
Why would a broker “STP” orders instead of “A-Booking”?
The benefit of straight-through processing for the broker is that it eliminates slippage between its customers’ order fills and hedged trade.
Slippage (or price slippage) refers to the difference between the EXPECTED price before we executed an order and the ACTUAL price at which they executed it.
In trading lingo, slippage refers to the difference between the requested price and the price at which an order is actually filled.
Slippage typically occurs around times of news or economic announcements where extreme market volatility can be either positive or negative.
In a rapidly changing market or in the event of order transmission delays, the price presented to you may no longer remain in effect at the time they executed your order.
This difference between the two prices is what’s commonly referred to as “slippage.”
If slippage occurs, your broker does not re-quote a price to you.
Rather, your order would be executed at the prevailing price at the time the order is received.
This will happen regardless of the direction in which the market has moved.
The slippage is symmetrical.
This means that experiencing price slippage is just as likely to be to your advantage or to your disadvantage.
In order to prevent the order execution price from slipping too far from your intended price, most brokers allow you to include “bounds” with your market or entry order.
In that case, they will not execute your order if it received the price at the time your order falls outside of the specified bounds.
For example, if the broker is quoting you a buy (ask) price of EUR/USD at 1.1000, it wants to make sure it’s able to buy EUR/USD at a lower price with an LP, say 1.0999.
STP allows the broker to ensure that it is able to “secure” this price before it confirms its order with you.
Otherwise, if it doesn’t, it might LOSE money on the hedge trade!
But while they eliminated the possibility of slippage for the broker.
The possibility of slippage for YOU (the customer) has increased.
If the price that was confirmed with the LP is different from the one you sent, this is the price that your order will execute.
This may be better (“positive slippage”) or worse (“negative slippage”) than what you had expected.
Execution speed is slower because before the broker can confirm your trade.
FIRST, it must receive confirmation from its LP regarding its trade.
During this process, it’s possible that the price may have moved.
And during this time the price confirmed between the broker and the LP may have changed.
If it has, this is the price that YOUR trade with your broker will be executed.
This is what causes slippage.
When an STP broker accepts a customer’s “order”, the broker is considered to be “working” that order.
This indicates a willingness to attempt, but not commit, to enter into the trade at the price requested by the customer.
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