Broker types and broker revenues: fixed or variable spreads or commission?

ECN Forex brokers always have variable spreads. They charge commission for trading Forex. Commission is the only revenue/profit an ECN broker gets. ECN brokers do not make money on the bid/ask (spread) difference.

An STP Forex broker is usually compensated through the spread (more precisely: spread markups – will be explained in details below).

STP brokers do offer variable or fixed spreads. STP brokers route all trading orders to the liquidity providers - banks. These brokers are intermediaries between their clients and banks. They receive prices (spreads) posted by the banks on the Interbank market. The most banks, in fact, offer fixed spreads and are market makers.

An STP broker has 2 options:

How does an STP broker earn its money? STP brokers (as well as ECN) do not trade against their clients. They add own small markups to the spread quote. This is done by adding a pip (or half a pip, or any other amount) to the best bid and subtracting a pip at the best ask of its liquidity provider. All client orders are directly routed to the liquidity providers at original spread quoted by those providers while an STP broker earns its money from own markups.

Forex market maker - a broker with a dealing desk earns its money on bid/ask difference as well as when a client loses a trade, since market makers are trading against their clients by hedging - entering in an opposite trade. But the positive trades are routed to a liquidity provider.

Conclusion:

ECN brokers are the best choice among Forex dealers. They do not profit on spread difference. They only earn from commission. The aim for ECN brokers is that their clients win; otherwise there will be no commission to earn. They can set their own commission level and assign their own earnings.

STP brokers make money on spreads, they are able to set their own price - the spread markup - for routing trading orders to liquidity providers. STP brokers are also interested to see their clients trading profitable, so that a broker can continue earning on spreads. Summarized there is not a big difference in the earnings of an ECN broker compared with an STP broker. The only thing that is different is that you do not know which part of the spreads an STP broker gets. But you always see the height of the commissions of an ECN broker.

Market makers make money on spreads and by hedging against their clients. However, if a client becomes "too" profitable, it can directly "upset" the broker. While this may be tolerated and professionally managed by a larger reputable market maker, with a smaller dealer such client will be soon asked to leave.