The US financial watchdog, National Futures Association (NFA), released a new directive for forex brokers on 4th, December. The amendment pursues greater transparency regarding the order execution costs. NFA now requires STP (Straight Through Protocol) forex brokers to disclose any commission, fee, price mark-ups and mark-downs and non-STP forex brokers to disclose mid-point spread cost at the request of the customer.
The bizarre term, mid-point spread cost, is further explained by NFA as the difference between executed price of the order and mid-point of the bid/offer spread at the time the forex brokers receives the order from the customer.
What does Straight Through Protocol mean?
Let me try to explain the other peculiar term called Straight Through Protocol (STP). This is about the forex broker’s revenue model. STP forex brokers act like a middleman between their clients and liquidity providers. Their revenue comes from the mark-up on the bid/ask spread which they receive from the liquidity provider. In other terms, they are compensated by widening the spread so their revenue doesn’t depend on the customer’s loss. STP brokers might be categorized as spread takers.
On the flip side, non-STP forex brokers operate on a dealer model where the firm determines the bid/ask spread and carries the full risk of the trade. If the customer wins on the trade, the broker loses and vice-versa. Thus, non-STP brokers could be classified as spread or price makers.