Setting up the instrument classes for retail traders is a crucial activity that accompanies brokers throughout their business life. Today we will take a look at the three most frequently used offer types: fixed spreads, floating spreads and STP (market). Nevertheless, you should keep in mind that the above is an open catalog, a wide range of other offer types might be encountered. Though the non-regular ones are based on the three major setups mentioned above.
Regardless if you have just kicked off with your brokerage or you’d like to extend your offer for existing clients, understanding how different offer types work is crucial as it will help you to manage your business in a more effective way.
The difference between fix, floating and STP is not just a matter of spread range, it is also about an execution process. Below I describe the three types separately and point out their vital characteristics.
Fixed spreads offer, often called a basic offer, assumes a constant range of spread between the bid and ask (offer) prices. Although it is fixed, during high volatility periods, the spread range might be increased, especially in the case of important market data publications. In terms of execution, stop orders are guaranteed: stop loss – to close a position and buy or sell stop – to enter a market.
Also, limit orders are executed at client prices or better from the trader’s perspective. Instant execution order is offered, which means that the order is executed at client price or is rejected in case it changes significantly between the moment of order request and execution time. If it comes to placing a pending order, there are minimum limits defined, which means the price of the order should be set at some predefined distance from the current price. Usually, brokers do not charge commission under basic offer, mark up on spreads is used instead.
With floating spreads, also known as the standard offer, the spread changes according to the market conditions. Stop order prices are not guaranteed, after the settled limit is hit the order is executed at the market price. Just like in the basic offer case, limit orders are executed at trader price or better, however, there are no limits on pending orders. Instant execution order is offered. Usually, a commission is not charged, instead, spreads are modified, just like in the above-described offer type.
Under STP offer, also called PRO or market offer, clients are provided with prices with floating spreads, they are however tighter than in the standard offer example. Orders are executed with volume-weighted average prices, which means that some part of the order might be filled with a bit worse price. However, there are no rejects until any volume is present in the book. Just like in the standard offer case, stop orders are not guaranteed, execution is made at market prices after the limit is hit and limit orders are executed at client prices or better. There are no limits regarding placing pending orders as well. Contrary to basic and standard offers brokers usually charge commission for trades, however, the spreads are not modified.
To sum up, the most important characteristics of described offer types below is a table with a short comparison based on FX market standards.