How does straight through processing work?

Straight through processing: What is it?

The name STP or straight through processing refers to a system for processing financial transactions on a "straight through" basis, which is equivalent to processing without any waiting period and therefore continuously.

This expression is mainly used in the financial sector and particularly in relation to brokers. Those who use STP process orders and quotes as they come in.

The term was coined in the United States when the reform reducing the time between settlement and delivery of stock market transactions to 3 days was introduced. Previously, this period was much longer. Since then, this system has been used by the vast majority of banks and brokers who use computerised gateways, allowing the almost instantaneous processing of their clients' orders.

The objective here is of course greater consistency and faster monitoring of price changes in relation to orders placed.

The advantages of straight through processing :

From the investor's point of view, the straight through processing system has clear advantages. The first of these advantages is of course the guarantee that the order placed will be at the price observed on the spot. If this is not the case, there may be a significant difference between the price at which a position is bought or sold and the real price of the asset, which may lead to significant losses.

This same STP has a similar advantage for the broker who could, in the same way, lose money, since it is through it that the clients' orders are placed. Today, the vast majority of brokers in the stock market use this process of transmission in the run, which guarantees an optimal use both on the client's side and on his side.

How do I know if a platform uses straight through processing?

As we have just seen, the vast majority of online trading platforms already use STP. But if you want to be sure, just go to the description page of the platform or other technical solution offered, and check that the STP acronym is mentioned there.

If you can't find this information, please contact the helpdesk and they will answer you.

How does Straight Through Processing work in practice?

Before attempting to explain the concrete functioning of the STP system, it is important to understand that the financial markets are immense and carry out very large transactions every day, but also every minute or second that passes. The sheer volume of transactions is therefore impressive and requires a very high level of responsiveness.

Indeed, when a trader connects to his trading platform and places buy or sell orders, what actually happens? In other words, how does the broker process this information?

To understand this, we will make the difference between what happens on the front-end, which corresponds to what the trader sees on his online trading interface, and the back-end, which is what the broker actually handles, which perceives the information very differently. While the trader will observe charts, order buttons or information on the size of his account and his open positions, the broker will have to manage this same information as well as that of thousands of other traders who invest simultaneously.

Since their inception, trading platforms have made great strides from a technical point of view and this information and data is transmitted very quickly in milliseconds or even sometimes in micro or nano seconds.

A transaction involves several parties placing and executing an order. Thus, the buyer is the main counterparty in a sale transaction and the seller is the counterparty in a purchase transaction. It is the broker who acts as the link between these two parties and who uses a liquidity provider, usually a large bank, which is responsible for providing the prices to the various parties.

In terms of currency trading, things are a little different in that there is no dedicated financial centre for the foreign exchange market, in other words, no physical location or physical recording of executions and transactions. All transactions are done virtually.

In both cases, the broker in charge of processing the transaction will locate it and match it to a counterparty investing in the opposite direction. However, there could be conflicts of interest here due to the very structure of the market, which is mainly occupied by traders with low capital. A liquidity provider such as a bank will of course not sell individually to these low capital traders as this would be too time consuming and costly. This is where the brokers' STP system comes in, which allows large transaction volumes to be split almost in real time on the buy or sell side and thus allows traders wishing to take buy or sell positions in these same assets to do so. Thus, for the trader, taking a long or short position only requires clicking an order button and takes only a few micro seconds.

Brokers using the STP system allow retail investors to access the interbank market where different liquidity providers offer assets for trading. Through this system, brokers can vary prices according to the strength of supply and demand in the market.

Why do most brokers today use Straight Through Processing?

Straight Through Processing was created by the financial services industry and is now perfectly suited to the stock and financial markets due to many of its advantages.

This is because the finance industry, unlike other industries such as goods manufacturing, does not trade in physical goods that require, for example, storage or shipping with the costs and risks that this represents. Financial markets actually sell property rights and obligations that can be much more easily translated into computer language.

Since 1970, investors have been able to take advantage of computers and their networks to process this information by computer. It should be noted that electronic commerce did not really become widespread until much later, in the 1990s.

In the financial world, automated and computerized data processing has several important functions, such as partial automation of back-office functions such as accounting and auditing, as well as automated payment processing, customer authentication and verification. Having this information processed directly through the STP system has reduced the need for communication such as phone calls between the different parties, sellers and brokers in some markets. It has also reduced the reliance on some technological devices such as fax machines.

In the past, and before the advent of this online processing system, most transactions were carried out through another system called T + 3, which is still opposed to it today and which operates, as its name indicates, with a settlement cycle of three days. In practice, this means "trade date + 3 days". Here, the seller of a security had to hand over the paper certificate for his share and then, after a maximum of 3 working days, the buyer had to make payment for the transaction.

In view of the explanations we have just given you, choosing a broker using Straight Through Processing is undeniably a good idea because these brokers are the only ones who can execute your orders directly. You can thus benefit from an unbeatable reactivity and see in real time your positions being opened and closed without any waiting period either on the charts or on your account balance. All you have to do is click a button and the trade is processed and recorded almost instantly.