More firms are offering straight-through processing as a means to cut out the middle men and offer traders a faster and simplified way of executing forex transactions
The rise of straight-through processing (STP) for online retail trading as the preferred method of settling transactions has continued to steam ahead in the last few years; but while it was once designed to speed things up, it’s now being used to reduce risk and cut down on costs. For online forex providers, this means yet greater efficiencies in operational costs that could potentially be transferred onto customers.
Often confused with electronic communications network (ECN) brokers, which are usually used between banks as they require a higher volume of trades, and market makers, STP brokers are more geared towards the retail, smaller-scale trader. The move towards STP makes sense as a reflection of the increasingly fast-moving way forex trades are conducted online, as well as the rapidly growing popularity of such trades among retail investors, and the around the clock nature of the market.
Retail investors are also likely to be more concerned with speed of transaction. However, ensuring the security of these trades is equally as important, and it is only now that the model of STP can offer the same levels of security as the traditional T+3 (the trade plus three business days) processing methods favoured in the past by financial institutions.
Regular stock market transactions tend to have a higher level of transparency than those in the relatively under-scrutinised forex markets. Whereas forex traders used to have to use an intermediary to carry out and confirm their transactions, with STP methods meaning these third parties are eliminated, allowing the trader to deal just with the brokers who execute the trade. Due to the lack of intermediary, there is less chance of fees being added onto the trades, and traders deal directly with those providing liquidity.
Such has been the shift towards this method that most brokerage firms across the world describe themselves as using STP to implement their transactions. The electronic execution of STP transactions aligns itself with the online forex traders, as the need for paperwork and human interaction is removed. This means that once a trader sends an order through a Forex broker, the transaction is immediately carried out, instead of having to go through a series settlement processes that can a few working days.
It also reduces the risks involved for traders. Whereas with the T+3 method could result in human error causing delays or invalid trades, STP transactions are less likely to suffer because of the reduced time and lack of human involvement.
It’s not just forex brokers that are embracing STP as their preferred method of executing transactions, but also asset managers, dealers, custodians, large banks and other financial institutions. However, although the shift towards STP has been steady over the last few years, fully realised automation of trades is unlikely to happen for some time. This is because of many firms having different systems and practices in place, as well as the lack of a proper industry standard.