ECN, STP and market maker: what the execution labels really mean

Retail brokers describe themselves with a small vocabulary of labels: ECN, STP, NDD, DMA, market maker. The words suggest precise, regulated categories. They are not. No major regulator licenses a firm as an “ECN broker”. These are descriptions the firm chooses for itself, and two brokers using the same label can run very different businesses.

The more useful question is simpler. When you open a trade, who is on the other side, and what happens to your order next?

The three basic models

Market maker. The broker quotes its own prices and becomes the counterparty to your trade. In over-the-counter forex and CFDs this is the default legal structure: you contract with the broker, not with an exchange. The US Commodity Futures Trading Commission puts it bluntly in its guidance for retail customers, noting that in off-exchange forex you trade only with your dealer and that the dealer earns money when you trade more, lose money or pay fees.

STP (straight-through processing). The broker still sits between you and the market, but it passes your order on to one or more liquidity providers, usually banks or non-bank market makers, and earns a markup on the spread or a commission. Legally the broker may still be your counterparty, entering an offsetting trade with its provider at the same moment.

ECN (electronic communication network). The term originally described venues where many participants post bids and offers and trade anonymously. In retail marketing it usually signals raw pricing from a pool of providers plus a separate commission. Some firms do route to genuine multi-dealer venues; others use the word loosely.

A-book, B-book and hybrid

Industry insiders use a different shorthand. An A-book trade is passed on to an external counterparty, so the broker’s income comes from spread and commission. A B-book trade is kept in-house: the broker absorbs the market risk and profits when the client loses.

Most larger retail brokers today run a hybrid. Risk systems decide, account by account or trade by trade, what to hedge externally and what to internalise, often netting opposing client positions against each other first. Hedging everything would be expensive, and hedging nothing would leave the firm dangerously exposed, so most sit somewhere in between.

None of these models is illegal. Market making is a legitimate activity, and internalisation can mean faster fills and tighter spreads. The issue is how the conflict is handled.

A trader can live with a broker taking the other side. What matters is whether the firm manages that conflict and tells you about it.

Where the conflict shows up

When a broker profits from client losses, there is a structural incentive to widen spreads at awkward moments, slow execution, apply slippage asymmetrically or push clients towards more trading. Regulators know this, which is why they require firms to identify and manage conflicts of interest and to deliver best execution.

Recent supervisory work shows that the details matter. In its November 2025 review of CFD providers under the Consumer Duty, the UK Financial Conduct Authority found that most firms did not factor the price of their counterparty hedging into their assessment of whether their products offered fair value, even though hedging is a key part of how prices are formed. It also found wide, poorly justified variation in the overnight funding rates firms charged.

In Australia, ASIC’s regulatory guide RG 227 sets disclosure benchmarks for CFD issuers on an “if not, why not” basis. One of them covers counterparty risk and hedging: issuers are expected to maintain a written hedging policy and explain how they choose the counterparties they hedge with. That makes Australian product disclosure statements a useful place to see how a firm actually handles risk.

Questions to ask any broker

You do not need to know a firm’s risk-management settings to judge it. Ask, and read the documents that answer:

• Who is my legal counterparty? The client agreement will say. If it is the broker, the firm is dealing as principal whatever its marketing calls it.
• Do you internalise client flow, and on what basis? A straight answer is a good sign. Vague claims of “no dealing desk” are not an answer.
• Who are your liquidity providers? Firms that hedge externally can usually name the types of institution, and some name the institutions themselves.
• What does your order execution policy say? Regulated firms in the UK and EU must have one and explain it to clients. Look at how it treats slippage, requotes and fast markets.
• Is slippage symmetric? Price improvement should be passed on as readily as adverse movement.
• How are your costs built? Separate the spread, commission, financing charges and any markups.

The bottom line

“ECN” on a banner tells you very little. A broker that openly acts as market maker, explains how it manages the conflict and publishes a clear execution policy may treat clients better than one that hides behind a flattering label. Judge the firm on its documents, its regulator and its disclosures, not on three letters in its advertising.