Straight-Through Processing (STP) is often marketed as a superior execution model that sends client orders “directly to the market.” However, this is not entirely accurate since forex brokers always take the opposite side of a trader’s order.
STP execution is different from A-Book execution in how brokers handle orders.
Let’s break it down.
📌 What is STP Execution?
STP stands for “Straight-Through Processing.”
Originally, STP referred to the automation of financial transactions without manual intervention. It was widely used in institutional finance to speed up order processing and reduce errors.
However, in retail forex trading, the term has been redefined by brokers as a marketing term to imply faster, more transparent order execution.
✔ Retail forex brokers use STP to describe a process where customer trades are matched with liquidity providers (LPs) before execution.
✔ Unlike A-Book execution (which hedges after filling the trade), STP brokers hedge before filling the trade.
📌 A-Book vs. STP Execution
While both A-Book and STP brokers hedge customer trades with liquidity providers, they do so at different stages of execution.
| Execution Type | Risk Management Approach | Execution Speed | Slippage Risk for Trader | Broker’s Market Risk |
|---|---|---|---|---|
| A-Book (Post-Trade Hedging) | Broker executes trade first, then hedges. | ✅ Faster execution | ✅ Lower slippage risk | 🚨 Short-term risk exposure |
| STP (Pre-Trade Hedging) | Broker hedges first with an LP before executing client order. | 🚨 Slower execution | 🚨 Higher slippage risk | ✅ No market risk |
📌 With STP, the broker waits for a price confirmation from the LP before executing the trade. This prevents the broker from suffering losses due to price changes but increases the chance of slippage for traders.
📌 With A-Book, the broker fills the trade first, then hedges, resulting in a faster execution speed but short-term risk exposure.
📌 How STP Execution Works
When you place an order with an STP broker:
1️⃣ Your broker does NOT execute the trade immediately.
2️⃣ Instead, it first sends an order to a liquidity provider (LP) to “lock in” a hedge.
3️⃣ Once the LP confirms the price, the broker fills your trade at that price.
✔ This method ensures that the broker is always “covered” and does not face market risk.
🚨 However, this delay increases the chance of slippage for the trader.
📌 Example: STP Trade Execution
🔹 Scenario 1: Positive Slippage
1️⃣ You place a buy order for EUR/USD at 1.1000.
2️⃣ The STP broker requests a quote from LPs.
3️⃣ LP confirms 1.0998 (better price for you).
4️⃣ Your order is filled at 1.0998 instead of 1.1000 (positive slippage).
✅ You received a better price than expected.
🔹 Scenario 2: Negative Slippage
1️⃣ You place a buy order for EUR/USD at 1.1000.
2️⃣ The STP broker requests a quote from LPs.
3️⃣ LP confirms 1.1002 (worse price for you).
4️⃣ Your order is filled at 1.1002 instead of 1.1000 (negative slippage).
🚨 You received a worse price than expected.
📌 Why Do Brokers Use STP Execution?
STP brokers prefer this method because it:
✔ Eliminates market risk: Since the broker hedges before executing the order, it never takes on market exposure.
✔ Prevents negative P&L risk for the broker: Unlike A-Book brokers, STP brokers never lose money on unfavorable price movements.
✔ Ensures all trades are matched with LPs: Every trade is backed by an LP, so the broker cannot be accused of taking the other side of the trade.
📌 How Do STP Brokers Make Money?
Since an STP broker does NOT take market risk, it must generate revenue in two main ways:
1️⃣ Spread Markup
✔ The broker adds a small markup to the raw LP spread.
✔ Example: If LP offers EUR/USD at 1.1000/1.1001, the broker adds 1 pip markup and quotes 1.1000/1.1002 to the trader.
✔ The broker earns 1 pip on every round-trip trade.
2️⃣ Commission-Based Model
✔ Instead of a spread markup, some STP brokers charge a fixed commission per trade.
✔ Example: $5 per lot per side ($10 per round-turn trade).
✔ This is a more transparent fee structure, as traders get raw spreads from LPs.
🚨 Many STP brokers combine both methods—charging commissions while also adding a small spread markup.
📌 STP Execution vs. A-Book Execution: Which is Better?
| Factor | A-Book Broker | STP Broker |
|---|---|---|
| Order Execution | Immediate execution | Delayed execution |
| Slippage Risk | Lower risk of slippage | Higher slippage risk |
| Market Risk for Broker | Short-term risk exposure | No market risk |
| Broker Revenue | Spread markup + commissions | Spread markup + commissions |
| Order Routing | Broker hedges AFTER executing the trade | Broker hedges BEFORE executing the trade |
📌 A-Book brokers offer faster execution with minimal slippage.
📌 STP brokers eliminate risk for themselves but introduce slippage risk for traders.
📌 Potential Issues with STP Execution
While STP execution offers transparency, it has several drawbacks:
🚨 1. Higher Slippage Risk
📌 Since the broker waits for the LP’s confirmation, traders are more likely to experience slippage (both positive and negative).
✔ Solution: Use limit orders instead of market orders to avoid unexpected price fills.
🚨 2. Slow Execution Speed
📌 STP orders take longer to process because the broker must secure an LP quote before executing the order.
✔ Solution: STP brokers should have multiple LPs to ensure faster execution times.
🚨 3. Limited Liquidity During High Volatility
📌 During major news events, STP brokers may struggle to get quick LP fills.
📌 If no LP accepts the trade, orders may be rejected or re-quoted.
✔ Solution: Use brokers with multiple LPs to improve execution reliability.
📌 Summary: Should You Trade with an STP Broker?
✅ Pros of STP Brokers
✔ No market risk for the broker (no conflict of interest).
✔ Orders matched with real liquidity providers.
✔ More transparency than B-Book brokers.
✔ No dealer intervention in order execution.
🚨 Cons of STP Brokers
❌ Higher slippage risk for traders.
❌ Slower execution compared to A-Book brokers.
❌ Liquidity issues during volatile market conditions.
📌 Final Thoughts: A-Book vs. STP Execution
✔ A-Book execution is generally better for traders who need fast execution and minimal slippage.
✔ STP execution eliminates broker market risk but increases slippage risk for traders.
✔ If choosing an STP broker, look for one with multiple liquidity providers to reduce execution delays.
🚀 The best brokers offer both A-Book and STP execution, allowing traders to choose their preferred model.
