subject: Ecn Style Trading Vs Market Makers [print this page] In today's modern forex trading there are 2 main types of brokerage companies: market makers and ECN style brokers.
Let's talk about both of broker types.
First of all, Market Maker Broker.
Market maker broker is a company authorized to create and maintain a market for an instrument. Market maker usually takes the other side of the trade and usually widen the spread at times especially in volatile times. They are usually a brokerage firm or a bank who quotes both a buy and a sell price in a financial instrument or commodities, hoping to make a profit on the turn or the bid/offer spreads. These type of brokers usually advertise that they charge no commission on trades but in fact make their commission on the spread between the bid/ask ie 3-4 pips depending on the currency pair. Market makers are very important for maintaining liquidity and efficiency for the particular finanacial instrument, as they make markets by taking a short or long position for a time, thus assuming some risk, in return for hopefully making a small profit on the bid/ask/offer spread.
Although some of these brokers offering the market maker forex trading platform have wide spreads, some offer more narrower spreads as well as offer benefits such as extensive trading resources, free market analysis, forex news (for example, DJ newswires) etc.
So what is ECN? ECN stands for Electronic Communications Network. These kind of brokers do not have a dealing desk with human dealers but do offer a sophisticated automated marketplace consisting of several market makers and banks. Forex traders can enter competing bids and offers into the trading platform either inside and outside the spread thereby offering tight spreads and more liquidity. By trading through an ECN trader usually gets a better price than trading with a market maker. Therefore a forex order is routed to the best ask/bid offers. Currency spreads are usually quite low (about 0.2-1.7) pips. These type of brokerage firms usually charge a small compensation or comission fee. This small commission fee is how the ECN broker makes their money, they don't take the other side of the order as the market maker does. They only match and route your offer to the best bid/ask order in the electronic market place.
You become the market maker in using a ECN Forex broker. Place your order inside the spread or out and see if your order is taken up by one of the liquidity providers. This option is most suitable for scalpers and those traders who seeks to maximize their income from forex trading.
