How Execution Models Work: ECN, STP and Market Maker

Someone has to take the other side

Every retail forex trade needs a counterparty. The execution model describes where that counterparty comes from: whether the firm takes the other side of the position itself, passes the order out to external liquidity providers, or routes it into a venue where orders from many participants match against one another. The model sits behind the price, and it shapes how costs appear and how orders behave under stress.

The market-maker model

A market maker quotes both sides and becomes the counterparty to the client's trade, managing the resulting exposure internally — netting one client's long against another's short and hedging what remains externally. This arrangement is usually described as a dealing desk, or B-book. It can supply continuous quotes and even fixed spreads in thin conditions, and it creates a structural position in which the firm's book gains when a client's position loses. That conflict is exactly what conflict-of-interest and order-execution policies exist to govern in regulated firms.

STP and no-dealing-desk routing

Straight-through processing passes client orders to external liquidity providers without a dealing desk intervening; revenue comes from a markup on the spread or a commission rather than from the client's loss. Execution quality then depends on how many providers are connected and how the aggregation ranks them — a routing setup with one provider behaves very differently from one aggregating several, even though both may be described as no dealing desk.

What an ECN actually is

An electronic communication network is a venue where participants' orders meet one another directly, showing depth of market and allowing a client order to sit as the best bid or offer rather than only trading against a quoted price. Pricing is typically a raw spread plus commission. On liquid pairs at active hours the spread can approach zero — and it can also widen sharply when the book empties, because nothing is smoothing it.

Labels are marketing; the structure is contractual

None of these terms is a licensing category, and firms commonly run hybrid models, handling some flow internally and routing the rest externally depending on the client, the instrument and the size. What actually describes the arrangement is the order-execution policy and the terms of business, which set out how orders are handled — and the regulatory status of the contracting entity determines what those documents are required to disclose.

What the model changes for a trader

The execution model affects the shape of costs, whether requotes are possible, whether depth of market is visible, and how the venue behaves when price moves quickly. It does not determine whether a trade is profitable, and no model removes slippage: the difference shows up in the fine detail of how an order is handled in the moments when liquidity is scarce.