Is Pepperstone an ECN Broker?
Pepperstone Razor account offers ECN brokerages with spreads from EUR/USD spreads averaging 0.13 pips and AUD/USD spreads 0.18 pips. This is lower than other ECN brokers which have higher commissions, fees and minimum deposits than Pepperstone.
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A common question asked by those who are considering using Pepperstone for forex trading is whether or not Pepperstone is an ECN broker. ECN stands for Electronic Communication Network, giving fast and direct access to forex markets, which is an attractive concept for new traders looking for the lowest spreads.
To help give you a better understanding of this topic and how Pepperstone carries out trades, we’ll explain everything worth knowing. All this information will make sure you’re fully informed about the brokerage and how using a platform like Pepperstone can provide you with some excellent benefits as a trader.
Is Pepperstone An ECN Broker?
Technically, no. But don’t be put off. Pepperstone is what’s known as a ‘No-Dealing Desk’ (NDD) broker that uses ‘STP’ (Straight Through Processing). How this works is very similar to the technical concept of an ECN.
The term ‘ECN’ (Electronic Communication Network) has become somewhat of a buzzword in the world of forex, and this is partly down to marketing and interpretation of the term. A major reason traders look for an ECN broker is to find somewhere that enables fast trades and the ability for retail traders to access raw interbank pricing for forex trading.
However, Pepperstone is basically able to provide the same benefits as an ECN broker through its NDD STP trading system.
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Is Pepperstone an STP broker?
Yes! Pepperstone is a NDD broker using STP for trades. Pepperstone could be considered as an ECN broker in many regards. But whereas a strict ECN broker only routes orders to the interbank market, Pepperstone makes use of external Liquidity Providers for its pricing.
Pepperstone isn’t a liquidity provider or a bank, so it can’t get official ECN status. Yet, its infrastructure and use of STP means that you get similar benefits – fast execution speeds and low spreads as close to the raw prices as possible.
Is STP and ECN the same thing?
ECN in its purest or truest form allows all market participants (liquidity providers, interbanks, hedge funds etc.) to compete against each other via a central hub or exchange. This type of execution makes use of ‘Depth of Market’ (DoM) for price transparency meaning you can see if you are getting the best price. Market participants also can’t see each other which means traders are completely anonymous. Not even the broker routing the orders to the ECN can see meaning they cannot intentionally take a position against you.
All this in theory means very tight spreads (as low as 0.0 pips). With spreads so tight, margins are very low, meaning the broker has to include a separate commission charge to make money for their service.
STP, like ECN, also routes your orders to a liquidity provider (or providers) but does not use a central hub of interbank market providers. Instead, an STP broker provides their own quotes with a selected liquidity provider (or an aggregated quote from their pool of interbank providers). The broker then acts as the counterparty to your trade using these aggregated quotes.
In their product disclosure statement, Pepperstone states “We’re the issuer of every derivative Contract that we offer and the counterparty to each trade.“. So for this reason we know that Pepperstone is using STP not ECN, since we know ECN makes it very difficult for the broker to be the counterparty to your trade.
Another clue that Pepperstone uses STP is because the broker offers a Standard account with no commissions. STP execution does allow the broker to widen the spread (much like a market maker) to cover their commission costs.
Overall, if you are wondering which is better, ECN or STP, well in their ECN but it’s not that simple and ultimately not something one should be concerned with.
The first reason is that an STP broker relies more on their commissions than spreads to make profit. By keeping spreads low, the broker hopes to encourage higher volume trading. If their spreads are wider than their competition then they won’t attract the clients they need to achieve these volumes. So at the end of the day, the spreads for an ECN or STP broker should be much the same.
In the case of Pepperstone (and many regulated NDD style brokers), the broker uses many of the top liquidity providers, the same providers that make up much of the ECN. So the quotes for spreads are likely to be sourced from the same market participants anyway.
Another reason you don’t need to concern yourself with Pepperstone manipulating prices is because they take their regulation very seriously. Being overseen by strict regulatory bodies such as:
- The Australian Security and Investments Commission (ASIC) in Australia
- Financial Conduct Authority (FCA) in the United Kingdom (UK)
- Cyprus Securities and Exchange Commission (CySEC) in the EU
- Federal Financial Supervisory Authority (BaFin) in Germany and Austria
- Dubai Financial Services Authority (DFSA) – Dubai and UAE
- Capital Markets Authority (CMA) – Kenya and Africa
- Securities Commission of The Bahamas (SCB) in the Bahamas
brings certain responsibilities and one of these is documenting their pricing processes which they are obliged to uphold or be penalised by the regulator.
The other factor to keep in mind is that there are very few true ECN brokers, even those that claim to be ECN are operating using an STP model. Acting as a broker dealer (i.e. using their own liquidity) is more profitable than routing an ECN for others to compete for your business.
Some STP brokers take things a step further and combine STP with ECN. In this case, the broker keeps the profitable trades to themselves and hands the risky trades to the ECN. Unfortunately, it is very difficult to tell if a broker is doing this but it’s not that important as the pricing from the trader’s end should be no different.
Is Pepperstone a no dealing desk broker?
Yes, Pepperstone is an NDD (No Dealing Desk) broker, which means orders are routed straight to the central interbank market and filled at the best available market rate with no dealer intervention. NDD comes in 3 types, ECN, STP and also Direct Market Access (DMA).
Pepperstone is a NDD with STP because it’s acting as your counterparty and taking an opposite position to your trade. but isn’t setting the prices themselves since they are using aggregated interbank prices. So, whereas some NDD brokers would link two counterparties (i.e. you and someone else), Pepperstone (like most STP brokers) uses this technology to connect with you directly for trading but without influencing the prices.
The opposite of a NDD is a dealing desk broker, which is more commonly called a market maker (or b-book broker).
Is Pepperstone a Market Maker?
No. However, it operates in a fairly similar manner. The key difference between Pepperstone and a market maker is that although Pepperstone acts as a trading counterparty, it doesn’t set the prices.
Like a market maker, Pepperstone quotes two sides of a trade using bids and asks. It’s within the spread of the bids and asks where Pepperstone makes its money. Although Pepperstone makes its profit in the bid-ask spread (and commissions), it’s not actually a market maker because it doesn’t have that all important price control – it uses the STP to access the most up-to-date prices and execute fast trades.
So you can think of Peppersone as somewhat of a hybrid between an STP broker and a market maker. Because, it does trade with you using its own liquidity and then manages its risk by hedging, but it’s not setting prices.
Is Pepperstone the counterparty to your trade?
Yes. When you make a trade on the Pepperstone platform, it will take the opposite side of the trade utilising its own liquidity. So, you’re not trading with other forex traders, you’re trading with Pepperstone.
The ability for Pepperstone to act as your counterparty is partly what allows such fast trade executions and low levels of slippage when you’re using the platform.
Does Pepperstone have variable (floating) or fixed spreads?
Variable spreads. Using this type of pricing comes with some key benefits to traders. For example, if you trade during the most liquid market periods, variable spreads can offer better prices than fixed spreads. This is because the spreads are able to widen or tighten based on supply and demand.
Fixed spreads are also naturally wide to begin with as it is the broker that takes the risk when markets are most volatile. Brokers need to widen their spread to ensure they earn enough cushion in good time to cover for worst case situations.
Speed of Execution – Is STP or ECN faster
It depends, but probably STP. ECN relies on a central hub of interbank dealers to compete against each other, this happens fast but can still slow the process.
STP means that the brokers are sending orders directly to liquidity providers. What really can affect the speed is the route taken to complete the order. If the order goes directly to the provider (in this case Pepperstone) then STP should be faster, but if it needs to go through several providers (perhaps because the first providers rejected the order) then it can take longer.
I want to scalp trade? Is STP or ECN better?
Pepperstone allows scalp trading. Any STP and ECN broker will allow it, if they don’t then they may be a market maker disguised as an STP or ECN broker. With speeds of 30 ms on average, Pepperstone is an excellent choice for scalping, just make sure you use the Razor account as costs are lower with this account.
Does Pepperstone hedge trading positions?
Yes, to manage risk Pepperstone will use other trades to offset your positions internally, but there are instances in which Pepperstone will use external providers to hedge trades if the market risk goes beyond certain thresholds.
Pepperstone’s major external hedging partners include:
- Jefferies Financial Services, Inc.
- LMAX Limited.
- IG Markets Limited.
- IS Prime Limited.
Does Pepperstone have requotes?
No, even if Pepperstone is unable to carry out a transaction at the quoted bid/ask price, there will be requotes on market orders. All trades with Pepperstone are executed using market execution, not instant execution.
Market execution means your trade is processed at the next best available price. Instant execution means that when your trade can’t be executed at the quoted price then it will ask you to approve the completion of the order using the revised price.
Requotes largely come into play due to slippage, as the forex market is so liquid, meaning prices are changing rapidly. However, it can also be applied by market makers who review all orders before executing them, and it is not in their interest to take a losing position.
Do you get slippage with Pepperstone?
Yes, this is possible (but it is with any forex broker not using fixed spreads). However, what sets Pepperstone apart from some other trading platforms is its ability to minimise any potential slippage.
Slippage can occur with variable spreads, but Pepperstone minimises your slippage risk by reducing the chances of latency. This is done in two ways. Firstly, by using fast infrastructure like fibre-optic connectivity. Secondly, by placing the servers in the same data centre as the major liquidity providers, thus reducing the distance the data needs to travel.
To offer this accurate and adaptable pricing model, Pepperstone partnered up with Equinix. Using the Equinix NY4 data centres in New York and LD3 in London means that Pepperstone customers can take advantage of state-of-the-art hosting and fibre connectivity which delivers nano-second pricing. The major benefit to you as a customer is that this technology ultimately leads to better fills and faster trade execution.
Most orders execute in under 30 milliseconds, which is ideal for scalpers and those who use a forex expert advisor (computer software used for trading).
Despite these measures, slippage can still occur and a stop order might not be adequate. So as an extra layer of protection, a call warning or margin call system is used. Should this not work, and the worst does happen, all clients with Pepperstone receive negative balance protection.
What about gapping?
Holding an open position over a weekend is a good example of when you might face the risk of ‘gapping’. Weekend gapping can happen outside of market hours if news or events impact an asset’s price. Once markets close on a Friday, news could break over the weekend that affects prices. So, the opening price on Monday could be very different from the closing price on Friday.
Unfortunately, this is just the nature of these markets and it’s not something that can be avoided. However, the slippage that’s created by gapping is well-managed by the technology and infrastructure used by Pepperstone.
You can also help mitigate gapping slippage by keeping an eye on what’s happening in the wider economy and markets.
What is the Pepperstone fill rate?
Pepperstone has a 99.72% fill rate (based on trading data available from December 2022).
Differences with types of Pepperstone Accounts
You may also be wondering if there are any notable differences between the accounts Pepperstone offers and the technology used for trading these accounts.
Well, to keep things simple – both the Standard Account (MT4, MT5 & cTrader) and Razor Account (MT4, MT5, cTrader & TradingView) use the NND STP system. So, whichever account you want to use for trading, you can be comfortable in the knowledge that Pepperstone is providing you with all the tools and technology you need to succeed as a forex trader.
The difference between the Standard and Razor account types Pepperstone offers comes down to pricing and trading platforms.
A standard account includes the commission costs in the spread so the quoted price is not the true interbank price. This account is available with MetaTrader 4 (MT4) and MetaTrader 5 (MT5). If using MT4, you can also use Capitliase.ai trading platform.
The Razor account (sometimes called ECN Account) uses interbank prices, meaning the spread is not widened. Instead, Pepperstone charges a separate fee which is their commission cost. How much you pay will depend on your chosen platform and your base currency.
If using MetaTrader 4 or MetaTrader 5 then you will pay USD 3.50 to open a position and USD 3.50 to close a position (i.e. USD 7.00 round turn). While cTrader and TradingView is USD $6.00 per 100,000 traded converted to the account currency.
Both accounts are suitable for scalping but to save on costs, the Razor account is a better choice. While the cost difference between each account is marginal, frequency trading in high volume (especially when using leverage) can see costs add up over time.
Spreads start at 0.0 pips for the major currency pairs and some minor pairs such as EUR/USD and other currencies involving JPY, CAD, CHF, GBP and AUD. Other major currencies include NZD, HKD and SGD. In addition to Forex, other CFDs for trade include cryptocurrencies (like Bitcoin), Indices, gold and silver commodities, shares and Indices.
Since you are trading CFDs, you can use leverage. If using a retail investor account leverage is limited to 30:1 for major forex pairs and 20:1 for minor pairs in Australia, the UK, Europe and UAE. Other region regions can be up to 500:1. Just the use of leverage means there is high risk so trade responsibility and practice with a demo account.
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