Forex.ee CEO, Vlad Karpejev, speaks on ECN and MM brokerage models.
Today, I would like to tell you about the specifics of ECN brokerage model and how it differs from Market Maker operation principles.
What’s the difference between ECN Broker and Market Maker, anyway?
In today’s competitive market environment, there are different aspects of brokerage business that traders need to be well aware of. Obviously, when choosing a broker one would be assessing company’s reliability, reputation and looking at service reviews of existing clients. Each client has his own approach to trading, so specifications of accounts offered by brokers will play the crucial part in the selection process. Brokers strive to attract an increasing number of clients in a number of ways; however, speaking of accounts, it is obvious that traders are only interested in the most beneficial trading conditions that promise to be profitable in conjunction with the strategy they intend to use. There is a catch related to risks, though.
When it comes to choosing a broker to trade with, it is important to understand which business model the company adheres to as there are fundamental differences that might greatly impact the trading performance.
What types of brokers can you choose from and what are the risks?
In the market, there are two main types of brokerage operation models – ECN brokers and Market Makers.
ECN (Electronic Communication Network) brokers link together Forex market participants (e.g. banks, investment funds, retail traders, etc.) by means of aggregators, bridges, etc. Once an order is placed, the system searches for the best counterpart with the best available price to fill your order. This means you act as a liquidity maker and taker at the same time with no intermediaries or dealers involved in the execution process, which gives all market participants equal rights. Trading with ECN broker means you see the real market prices only and are able to execute your orders by that price.
Market Maker, on the other side, does not process orders to the market, but routes them through its own dealing desk, acting as the only liquidity provider for the client. By this, they “make the market” for traders: they buy when traders want to sell and sell when traders want to buy, meaning they take the opposite side of the trade. However, Market Makers are not interested in clients’ profitable trading simply because they take the other side of your trades, so the conflict of interest occurs. Also, Market Makers usually have fixed spreads with mark-up included.
Let’s take a look at the table below.
From this table, we can clearly see the significant differences between ECN and MM brokerage models. But how do they affect your trading on daily basis?
Firstly, trading with Market maker implies the conflict of interest, which means the broker only wins if you lose. This minimizes the chances of you making steady profits, because the broker is likely to give you requotes, intervene into your operations and restrict you actions in a variety of ways as soon as you start showing results that are constantly profitable.
In contrast, ECN broker only benefits from the commissions charged, so there is no conflict of interests, which means the company is interested in your successful and continuous trading. Among advantages of using true ECN technology we can name absence of trading restrictions, broker’s inability to manipulate the price feed, spreads from 0 pips and absence of requotes.
Since the majority of traders lose their money with MM brokers, such companies offer co-operation terms that might look beneficial at first, but bring a lot of frustration at later stages. For instance, MMs can offer bonuses given as a percentage of their deposit size or use such phrases as “Instant execution”, when really it means higher risks and no access to the market.
How do I check if my broker is True ECN?
Since use of ECN implies market execution, you should be able to affect the current market price.
To check if your orders are processed to the market you need to do the following:
Open a new limit order within the spread with OCTL2 opened (your selected price should be in between Bid and Ask prices);
- Observe the tick chart to see how your placed order immediately affects the spread;
- Look for your order price to immediately appear in the liquidity pool of OCTL2.
Please note that if your limit order execution was subject to slippage you can only be given a better price than requested when using ECN.
Forex.ee is an established European broker with over 10 years industry expertise providing only professional trading conditions and authentic ECN Technology. The company attracts clients with competitive tight spreads and lowered commission, while delivering individual approach service. The exchange-like trading conditions on our
ECN accounts accurately reflect the needs and preferences of today’s traders – high execution speed, low trading costs, confidence in safety of funds. Our extensive list of liquidity providers combined with refined technology guarantees precise execution of orders in any market conditions. In addition to client personal area convenience, each trader is allocated a Personal Support Manager to ensure the quality of service.
Looking forward to future co-operation,
Your premier ECN provider –
Forex.ee.
paid
