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]b]ECN or Market Broker?[/b]
Most Forex brokers can be divided into two types: brokers that use an ECN system and brokers that are market makers. Some brokers operate both ways, depending on the account. Before choosing a Forex broker it’s important to understand how each of these operates and the advantages and disadvantages offered by each one.
An ECN network has hundreds of liquidity providers all sending quotes to the ECN venue at the same time. The ECN then aggregates all the quotes to show only the best bid and best offer, which make up the spread. This can be zero at times! You can see this is very different from STP brokers, who only stream quotes from several bank partners, compared to an ECN who has hundreds of LPs. It is much more likely that you will see a lower spread on an ECN broker compared to an STP broker.
How ECNs Works?
ECNs pass on prices from multiple market participants, such as banks and market makers, as well as other traders connected to the ECN, and display the best bid/ask quotes on their trading platforms based on these prices. ECN-type brokers also serve as counterparties to forex transactions, but they operate on a settlement, rather than pricing basis. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs, depending on the pair's trading activities. During very active trading periods, you can sometimes get no ECN spread at all, particularly in very liquid currency pairs such as the majors (EUR/USD, USD/JPY, GBP/USD and USD/CHF) and some currency crosses.
With a market maker it's a whole different story. A market maker, as the name implies, makes his own market. The buy and sell quotes presented in the market maker platform are determined by the broker. Of course, the quotes you see in a market maker platform change according to the movement of the market as the broker tries to follow events in the world markets.
How Market Makers Work?
Market makers "make" or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market. As counterparties to each forex transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.
Since the market maker broker controls the quotes, he will usually offer the traders a fixed spread that already includes a commission in it. This spread will be a bit bigger than the spread of an ECN broker, but the additional spread allows the market maker to maintain a given spread on offers even as the market itself is shifting.On the other hand, an ECN broker will give his traders the best spreads possible. Thanks to the high liquidity provided by the ECN system, those spreads are pretty small. An ECN broker will usually display the spreads as he gets them and will then charge a commission on each trade. Under conditions of high volatility the ECN's spread will widen as a result of low supply and demand.To conclude, each type of broker has its own advantages and disadvantages; the right one for you will be the one that enables you to apply your own strategy successfully in the easiest possible way.
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