Why Execution Models Matter More Than Most Traders Think
When traders compare brokers, they usually focus on what is visible: spreads, commissions, regulation, and platform features. Execution model is often treated as a marketing detail rather than an operational one.
This is understandable. Execution happens behind the interface. It is invisible until something feels wrong.
However, the execution model influences how orders are routed, how liquidity is accessed, how slippage occurs, and how behaviour changes under volatility. In other words, it influences the environment in which your strategy operates.
As explored in our guide on hidden broker costs, much of what traders perceive as strategy failure can originate from structural friction within the execution environment. That friction is not always obvious, but it is rarely random.
The Problem With Execution Labels
Terms like "market maker," "STP," and "ECN" are widely used but poorly understood. They function more as simplified categories than as precise operational descriptions.
Many traders assume:
- Market maker equals conflict of interest.
- ECN equals neutrality.
- STP equals direct market access.
Reality is more nuanced. Two brokers using the same label can implement execution in materially different ways. Conversely, brokers using different labels may behave similarly under certain conditions.
The label does not determine execution quality. Implementation does.
Market Maker: Internalisation and Risk Management
A market maker, in simplified terms, may take the opposite side of a client's trade or internalise order flow before deciding whether to offset it externally.
This structure is often presented negatively in retail discourse. However, internalisation is not inherently adversarial. It is a risk-management and operational efficiency decision.
By matching opposing client orders internally, a broker can:
- reduce external liquidity costs,
- maintain stable pricing,
- and manage exposure dynamically.
For many traders, this results in predictable and stable execution, particularly under normal market conditions. The trade-off appears under stress.
For scalpers, as discussed in our guide on why scalpers lose money with the wrong broker, these structural nuances can materially affect outcomes.
STP: Direct Routing in Theory, Variability in Practice
Straight Through Processing (STP) is typically described as a model in which orders are routed directly to liquidity providers without intervention from a dealing desk.
In practice, STP is a broad operational category. Routing logic, liquidity sources, and aggregation technology vary significantly between brokers.
Some STP brokers may still internalise certain order flows based on exposure thresholds. Others may route selectively depending on trade size, instrument, or volatility conditions.
The term describes a routing intention, not a guarantee of uniform execution behaviour. Slippage is not eliminated in an STP model — instead, it reflects actual liquidity depth and order-book interaction.
ECN: Liquidity Aggregation and Raw Pricing
Electronic Communication Network (ECN) models are often marketed as offering direct market access with raw spreads and commission-based pricing.
In this structure, the broker aggregates liquidity from multiple providers and routes orders through a network rather than internalising them. This often results in:
- tighter minimum spreads,
- transparent commission structures,
- and more visible market depth interaction.
However, tighter raw spreads do not automatically translate into lower all-in costs. Commission sensitivity increases with trade frequency and size.
In other words, ECN models do not remove friction. They change its source.
Internalisation vs External Routing: The Structural Core
More important than marketing labels is the distinction between internalisation and external routing.
Internalisation can produce:
Stable pricing, consistent spreads, and reduced external liquidity noise.
External routing can produce:
Greater transparency, price improvement potential, and market-reflective slippage.
Neither structure is inherently superior. They prioritise different trade-offs. The suitability of either depends on strategy sensitivity to execution variability.
How Execution Models Interact With Trading Styles
Execution model relevance varies significantly by trading style.
Scalpers are particularly sensitive to fill speed, slippage asymmetry, and spread predictability. Structural latency or conservative risk controls can materially reduce expectancy.
Intraday traders experience cumulative effects of slippage and volatility-based spread changes. Execution consistency matters more than theoretical minimum pricing.
Swing traders are far less sensitive to millisecond latency and micro-slippage. Financing costs and operational stability are often more significant variables.
Position traders typically care least about execution routing details. Financing, regulatory environment, and capital efficiency dominate.
Common Myths About Execution Models
One persistent myth is that market makers always trade against clients. In reality, internalisation often reflects risk balancing and operational efficiency rather than adversarial intent.
Another myth is that ECN models eliminate slippage. They do not. They expose traders more directly to liquidity depth, which may increase visible variability.
A third misconception is that raw spread pricing is always cheaper. Commission-based structures can exceed all-in spread models depending on frequency and position sizing.
When Execution Model Actually Matters
Execution structure becomes more relevant when:
- Trade frequency is high.
- Profit targets are small relative to spread.
- Entry timing is precise.
- Volatility exposure is frequent.
It becomes less relevant when holding periods are long, trade frequency is low, and strategy expectancy exceeds micro-friction. Context defines importance.
Final Synthesis
Execution models are structural frameworks, not moral categories. Understanding them is not about preferring one universally. It is about recognising which environment minimises friction for how you trade.
Execution structure is invisible until it matters. When it does matter, it rarely announces itself clearly. A structured understanding prevents unnecessary switching, misplaced blame, and avoidable friction.
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