When deciding which broker to trade through, there are many points and criteria to keep in mind. Are they regulated? Is their platform stable? Do they offer tight spreads? One such point which will be near the top of the list in considerations is whether to go with a broker that offers ECN pricing or whether to go with a market maker broker? Whilst market maker brokers have received a fair amount of negative press over the years it does have some plus points as well. It is worth understanding how each broker type works, their pros and cons before deciding which broker type best suits your trading strategy and style.
ECN stands for Electronic Communications Network. This is where the ECN broker provides clients direct access to a network of liquidity providers in the forex markets. This network is comprised of institutions which provide liquidity in the interbank market, as a result liquidity is deep ensuring speedy execution and no re quotes. Furthermore, large orders and easily filled and these institutions are often in direct competition, so they provide extremely competitive spreads. Any orders placed get matched off against the liquidity providers meaning that the broker never trades against you so there is no conflict in interests.
There are a few negative points to keep in mind with ECN brokers. You will often find that their minimum trade size is larger than that of market maker brokers, although this is not always true. Vantage FX is an ECN broker whose minimum trade size is competitive. ECN brokers have extremely tight spreads, but they often have a commission charge. Finally, the counterparty will almost always be better informed that the retail trader.
Market Maker Broker
Market maker brokers have a dealing desk. This dealing desk is makes the market by creating the bid ask price. Whilst the desk, on the while will try to net off clients against each other, this is not always possible. In these circumstances, the broker will take the other side of the trade and them attempt to hedge the risk in the market. This is done using an external liquidity provider. On occasion the broker will take the decision not to hedge the risk at all. So here the broker is trading directly against the client which opens up all sorts of questions over conflict of interest. How can the broker possibly be rooting for you to win if they are the other side of the trade? Quite the reverse, they will be keen for you to lose. This has created plenty of uproar in the past.
So why would you ever trade with a market maker broker? There are a couple of pros to keep in mind. Market maker brokers can offer guaranteed stops, fixed spreads and smaller capital requirements which can sometimes make them more attractive to newcomers. However, more experienced traders will often seek the tight spreads and speedy execution of an ECN broker, such as Vantage FX.