In this lesson, we will explain the difference between\u00a0A-Book\u00a0and STP execution.<\/p>\n\n\n\n
\u201cStraight-Through Processing<\/strong>\u201d is a term that is commonly shortened to \u201cSTP\u201d.<\/p>\n\n\n\n You may have seen this acronym mentioned by some forex brokers on their websites.<\/p>\n\n\n\n It\u2019s important to know that the term STP (Straight-Through Processing) <\/strong>has been hijacked by the retail forex trading industry and given a different meaning.<\/p>\n\n\n\n Originally, STP was a term introduced when electronic trading became available back in the day. It described the procedure that companies use to optimize the speed at which they process transactions.<\/p>\n\n\n\n Electronic trading enables \u201cstraight-through processing\u201d (STP), by which trades entered electronically<\/strong> <\/em>can likewise be processed (cleared and settled) electronically<\/strong><\/em>. Because STP involves no paperwork and little human intervention, errors are mostly eliminated which dramatically lowers operational costs and risk.<\/p>\n\n\n\n In a nutshell, STP enables the entire trade process to be conducted electronically without the need for re-keying or manual intervention<\/strong>.<\/p>\n\n\n\n That\u2019s how STP was originally defined, but then the retail forex industry decided to get creative with its usage.<\/p>\n\n\n\n Nowadays, it\u2019s used as marketing As you\u2019ve already learned, your<\/em> orders are never routed or sent to the \u201cmarket\u201d<\/strong> because your forex broker is your sole counterparty and always takes the opposite of your trade.<\/p>\n\n\n\n Let\u2019s see how \u201cSTP\u201d execution actually works.<\/p>\n\n\n\n A trade that is \u201cA-Booked<\/strong>\u201d is sometimes associated with being \u201cSTP\u2019ed<\/strong>\u201d or simply \u201cSTP<\/strong>\u201d.<\/p>\n\n\n\n Forex brokers may use them interchangeably in their marketing but they are NOT the same thing.<\/p>\n\n\n\n It\u2019s important to distinguish between the two concepts.<\/p>\n\n\n\n Depending on whether your broker is an \u201cA-Book broker\u201d or an \u201cSTP broker\u201d, your experience on how your order is executed will be different<\/strong>.<\/p>\n\n\n\n With an A-book broker, you will experience faster order execution and minimal slippage<\/strong>.<\/p>\n\n\n\n This is because the broker will execute your trade first<\/em>, and then hedge. Hence, why it\u2019s known as \u201cpost-trade hedging\u201d.<\/p>\n\n\n\n With an STP broker, you will experience slower order execution and a higher probability of slippage<\/strong>.<\/p>\n\n\n\n This is because the broker will make sure to \u201clock in\u201d its matching order with the LP first<\/em>, and then execute your order. Hence, why it\u2019s known as \u201cpre<\/strong>-trade hedging\u201d.<\/p>\n\n\n\n When your broker executes an offsetting position with a counterparty PRIOR to executing your order, this is known as \u201cstraight-through processing<\/strong>\u201d or \u201cSTP<\/strong>\u201d.<\/p>\n\n\n\n Why would a broker \u201cSTP\u201d orders instead of \u201cA-Booking\u201d?<\/p>\n\n\n\n The benefit of straight-through processing for the broker is that it eliminates slippage between its customers\u2019 order fills and hedged trade<\/strong>.<\/p>\n\n\n\n Slippage (or price slippage) refers to the difference between the EXPECTED price<\/strong> before an order is executed and the ACTUAL price<\/strong> at which it is executed.<\/p>\n\n\n\n In trading lingo, slippage refers to the difference between the requested<\/em> price and the price at which an order is actually filled<\/em>.<\/strong><\/p>\n\n\n\n Slippage typically occurs around times of news or economic announcements and extreme market volatility and can be either positive<\/strong> or negative<\/strong>.<\/p>\n\n\n\n In a rapidly changing market and\/or in the event of order transmission delays, the price presented to you may no longer remain in effect at the time your order is executed.<\/p>\n\n\n\n This difference between the two prices is what\u2019s commonly referred to as \u201cslippage.\u201d<\/p>\n\n\n\n If slippage occurs, your broker does not re-quote a price to you. Rather, your order would be executed at the prevailing price<\/strong> at the time the order is received regardless of the direction in which the market has moved.<\/p>\n\n\n\n Slippage is symmetrical. <\/strong>This means that experiencing price slippage is just as likely to be to your advantage<\/strong> or to your disadvantage<\/strong>.<\/p>\n\n\n\n In order to prevent the order execution price from slipping too far from your intended price, most brokers allow you to include \u201cbounds\u201d<\/strong> with your market or entry order.<\/p>\n\n\n\n In that case, your order will not be executed if the price at the time your order is received falls outside of the specified bounds.<\/p>\n\n\n\n For example, if the broker is quoting you a buy (ask) price of EUR\/USD at 1.1000<\/strong>, it wants to make sure it\u2019s able to buy EUR\/USD at a lower<\/em> price with an LP, say 1.0999<\/strong>.<\/p>\n\n\n\n STP allows the broker to ensure that it is able to \u201csecure\u201d this price before<\/em> it confirms its order with you<\/strong>. Otherwise, if it doesn\u2019t, it might LOSE money on the hedge trade!<\/p>\n\n\n\n But while the possibility of slippage for the broker is eliminated, the possibility for slippage for YOU (the customer) has increased.<\/strong><\/p>\n\n\n\n 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, which may be better<\/strong> (\u201cpositive slippage\u201d) or worse<\/strong> (\u201cnegative slippage\u201d) than what you had expected.<\/p>\n\n\n\n Execution speed is slower<\/strong> because before the broker can confirm your trade, it FIRST must receive confirmation from its LP regarding its trade.<\/p>\n\n\n\n During this process, it\u2019s possible that the price may have moved<\/strong> and the price confirmed between the broker and the LP may have changed<\/strong>. If it has, this is the price that YOUR trade with your broker will be executed.<\/p>\n\n\n\n This is what causes slippage.<\/p>\n\n\n\n When an STP broker accepts a customer\u2019s \u201corder\u201d, the broker is considered to be \u201cworking\u201d that order, which indicates a willingness to attempt, but not commit<\/strong>, to enter into the trade at the price requested by the customer.<\/p>\n\n\n\n Here\u2019s a comparison of the different types of order execution:<\/p>\n\n\n\n When a trade is executed via STP, this type of transaction is known as a \u201criskless principal<\/strong>\u201d or \u201cmatched principal<\/strong>\u201d transaction.<\/p>\n\n\n\n What is a \u201cprincipal\u201d?<\/p>\n\n\n\n A \u201cprincipal<\/strong>\u201d is a party to a transaction. For example, the buyer and seller. It\u2019s basically a fancy word for \u201ccounterparty<\/strong>\u201c.<\/p>\n\n\n\n Remember, your forex broker is always taking the opposite of your trade. When you buy, it sells to you. And when you sell, it buys from you.<\/p>\n\n\n\n It is the sole counterparty to all your trades.<\/p>\n\n\n\n![\"STP](\"https:\/\/bpcdn.co\/images\/2021\/06\/05204852\/stp-broker-innovation-360x360.png\")
<\/figure>\n\n\n\ninnovation<\/del> jargon to imply that the forex broker is not \u201ctouching\u201d or interfering with your orders nor benefitting from your losses because it supposedly \u201croutes (or sends) your orders straight through<\/em> to the market.\u201d<\/p>\n\n\n\nA-Book vs. STP<\/h2>\n\n\n\n
![\"A-Book](\"https:\/\/bpcdn.co\/images\/2021\/04\/26114507\/a-book-trade-execution.png\" "\\"A-Book")
<\/a><\/figure>\n\n\n\n<\/a><\/figure>\n\n\n\n<\/a><\/figure>\n\n\n\nRiskless Principal<\/h2>\n\n\n\n