Forex Trading – Market Maker or ECN Broker

In  forex  trading there are two types of brokers. The market maker type of

broker and the ECN broker. Lets cover these individually.

Market Maker Broker:

Market maker brokers is a firm authorized to create and maintain a market in an instrument. They are

usually a brokerage firm or a bank who quotes both a buy and a sell price in a

financial instrument or commodity, hoping to make a profit on the turn or the

bid/offer spread. 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.

This type of broker usually takes the other side of the trade and usually widen the spread at times

especially in volatile times. 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.

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 trading platforms, news etc.

ECN Broker:

On the other side of the industry there are brokers that are ECN brokers. What

is ECN? ECN stands for Electronic Communications Network. These ECN brokers do

not have a dealing desk but offer a computerised market place consisting of

multiple market makers, banks. Traders can enter competing bids and offers into

the trading platform either inside and outside the spread thereby offering

better spreads, more liquidity. By trading through an ECN a currency trader

generally gets a better price than trading with a market maker. Therefore a

 forex  order is routed to the best bid/ask offer. The spreads are usually quite

small 0.5-2 pips. These type of brokers usually charge a small commission fee.

This small commission fee is how the ECN broker makes their commission, 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.