ECN/STP trading, also known as Electronic Communications Network/Swap Trading Program, is a form of electronic trading that allows you to trade on the same exchange or broker where you have your account. This is a great way for traders to access markets they would normally not be able to access.
Brokerage firms have the same objective as all financial institutions: to earn a profit by trading financial instruments or commodities.
However, they differ from banks or stock exchanges in that they provide a service that allows clients to buy or sell financial instruments and commodities. Brokers are taking a small amount of charge or fee for their service, which is usually passed on to the client.
An ECN/STP broker is an intermediary between the client and the liquidity providers. They don’t internalize the orders but send them to liquidity providers.
STP Forex Broker
This model is used by other brokers as well, such as "High Frequency Trading" (HFT) firms, and other brokers, such as E*TRADE, which also uses an electronic matching model. In this model, there is no dealing desk, and the broker does not take on any counterparty risk. In that case, a broker will not send your orders directly to the liquidity provider, the order will be routed to the liquidity pool. The price of your order will be executed as the ask/bid rate which is provided by the liquidity provider. Liquidity providers like big banks, hedge funds and investors that effectively act as counterparties to each trade.
The other benefits of an STP broker include the 'DMA' and 'Firm Order Flow'. In trading DMA means a broker is passing their customer orders to the liquidity pool, they are doing it directly with the liquidity pool and it will be fully filled by the best possible price within a limited time. In that case, the broker will get a small amount of spread.
ECN Forex Broker
STPs have the same features as ECNs, and the only real difference is that the STP is essentially a liquidity pool for ECNs. An STP is a hub for ECNs, meaning that it can deal with liquidity providers outside of its own liquidity pool.
In the case of ECN trading, the market is mostly capped at 0.1 lots because the volume of orders is very low and liquidity providers are unwilling to provide liquidity for orders below this size. However, STP trading is a more flexible and scalable model because it can trade with smaller amounts of money (up to 1000 EUR).