The foreign exchange market, forex or FX is an unregulated global market in which trading does not occur on an exchange or a physical address. The network of market participants is not centralized; therefore, the price of a currency can be different from one broker to another in the same moment.
The most important market players are the largest banks in the world and they form a group where most trading activities take place. The name of this group is Interbank market. Retail traders as you are not able to trade the interbank market, but you can trade forex through two types of brokers, Market makers or ECN brokers. Now we are going to see the differences between these brokers: Market Maker or ECN broker.
How Market makers work
The market makers make both prices, ask and bid. They show you both prices, separated by spread and you can decide if you want to buy or sell. If you decide to buy the market maker have to sell to you, so he becomes your counterparty. To cover or hedge their positions they will try to pass your trade to someone else who wants to be your counterpart. Sometimes this is not possible and they act against you in the market.
- Currency price moves can be less volatile than ECN prices, but this is a major problem for scalpers.
- Some market makers offer platforms for newbies. Platforms are very user-friendly.
- The trading platform usually offers charts and news feeds.
- You can be involved in a conflict of interest when they trade against you.
- They may display the worse bid/ask price available.
- Market makers can manipulate prices to execute your stop loss or not reaching profits.
- Slippage can be very huge when news are released. It’s common to see the prices frozen for a while during important events.
- Scalping is not welcome in market makers brokers.
How ECNs work
The ECNs show all bid and ask prices available in the market and give you the best one possible. Consequently, spreads are lower (sometimes it’s 0) but they charge you a commission for each transaction. A true ECN broker never becomes your counterparty, but some brokers can do it in some particular situations.
- You can get better bid/ask prices thanks to several sources.
- Since you can offer a price between ask and bid, you can be like a market maker.
- Prices are more volatile, it’s better for scalpers.
- You can trade with very little or no spread.
- True ECN brokers will not trade against you, as they will pass your orders to a bank or another trader.
- Some ECN’s don’t offer charts or news feeds.
- Their platforms are not as user-friendly as Market makers ones.
- Traders have to pay commissions for each transaction.
- Stop-loss is harder to calculate because variable spread.