Market Makers vs ECN Brokers
Market Maker Broker
Market makers are the ones who set the bid and the ask price on their systems then displaying it in public as their quotes. They might for example get a 1 pip spread from the market and set it to 3 pips. The pips can vary from time to time as they can set it up or down; therefore it makes sense that the market makers will not want their client to win, so they take opposite sides. In simple words, everytime they sell, the market maker buys from them, and vice versa.
Market makers set rates that are beneficial to them making profit from the spread charged to their clients. Some of them give fixed prices making it seems more safe for the customer but find other ways to manipulate, like freezing the platform when financial news come in or by increasing their spreads significally. You are probably wondering now how do they get away with this? Believe it or not in Forex it is considered normal as Foreign Exchange is not strongly regulated.
Some of their advantages are: they provide an easy to use platform that includes news and charts at no cost making it very attractive for potential clients to come and start trading. In addition the amount required to open a new account is minimal with the offer of high leverage.
Their disadvantages on the contrary are a lot more form the advantages, some of them being: the fact that they trade against you, they offer high spreads in comparison with ECN brokers, they manipulate prices by moving the currency quote up to 20 pips further from the market rate. Lastly “accidental” freeze happens on the platform when traders wish to close their position and slippage occurs when news come out.
Electronic Communication Network (ECN) broker
The ECN pricing comes directly from the Interbank market without the interference of a third party. After choosing the best and lowest quote the ECN broker presents the best bid/ask price on their trading platforms. In comparison to Market Makers there is no dealing desk execution and everything happens over the counter (OTC) offering variable spreads of currency pairs on ECNs, always depending on the pair's trading activities.
You are probably thinking what is the catch? Why are they offering so low spreads and how do they make profit? The way ECN brokers make money is by charging customers a side commission for each transaction. For example you might get an average 0.4 spread on your ECN account plus a $2.5 commission per side per lot which is considered reasonable in the Forex Market. Genuine ECN brokers do not play tricks on their clients and do not manipulate prices as they do not wish to take position against them, in fact they want them to win and make more volume as they both benefit from it.
Some of their advantages are: The Client receives the best bid/ask price in the market, they trade on very low spreads and most importantly there is no dealing desk or manipulation in pricing as the order is passed directly to the market.
A number of their disadvantages are: the platform the client uses is not as easy or as user friendly as the ones that Market Makers offer, it is a lot harder to calculate stop-loss and breakeven points because of the variable spreads and lastly traders are normally charged a side commissions per side per lot.
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