How FX brokers work - behind the scenes of order execution

Purple Trading is a broker offering the most transparent order transaction model: Straight-Through Processing or STP. Purple Trading was founded by fintech company, Purple Technology and in an interview for Comparic.pl, Purple Trading’s CEO, David Varga, spoke frankly about our background as a broker. Here we set out the most important concepts that Forex and CFD traders should know about.
 

CEO Purple Trading - David Varga

Differences between STP and MM brokers

It should be noted that brokers use different infrastructure configurations to execute transactions.

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.  
 

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.
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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.

How do we know which model the broker uses?

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.

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".  

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.

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 we can encourage clients to trade with us by providing a professional, reliable and transparent service.
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