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ECN forex broker

Having decided that the market maker is our only realistic choice to access the $orex markettrade, the next question to ask is whether market makers are all the same, and the answer to this question is a resounding NO. Indeed they are all very different, and as the forex industry has been marketed as essentially one that is ‘free’ of trading commission, very few forex traders even consider paying fees when trading in the currency markets. I hope the following analysis may change your mind! In simple terms, forex brokers fall into one of four different types, the first of which is called an ECN broker which stands for Electronic Communication Network. The other three which we will look at shortly are the true Market Maker, a No Dealing Desk or NDD broker, and finally the STP or Straight Through Processing broker. There are also one or two hybrid brokers which are essentially an ECN and STP combined, but for the purposes of our analysis we will just concentrate on the four broad groups outlined above.

ECN Forex Brokers

The first thing to say about a true ECN broker is that they provide the purest form of $orex tradingd is the closest we can get to trading in the forex markets on a level playing field with the central banks. The reason for this is quite simple – ECN brokers charge for their services, and for each trade you will pay a commission, and no doubt like many other people, you are wondering why on earth you would want to pay for something which many other brokers are offering for free! You may also be wondering why I have started my analysis with something that appears to be a negative aspect of an ECN broker, ie a charge! The answer is simple – the fact that they charge is a positive attribute in the forex market, as it removes the one aspect of forex trading that blights the industry, and that is the issue of a conflict of interest, that is rampant in all forex trading at the retail level. By charging a small commission for each trade, an ECN broker is immediately differentiated from the other forex brokers, as this conflict of interest issue is immediately removed. When you open a position with an ECN broker, this is passed straight into the interbank market, where it is matched with an opposing order from another market participant, and is similar in many ways to the way the futures markets operate in a central exchange. As with other market makers, the ECN broker stands as a counter-party to the transaction, matching buyers and sellers in the interbank liquidity pool for fair and transparent trading, and in addition,  will also offer variable spreads, rather than fixed spreads, which vary based on the true market in the pool. Naturally these spreads can and do change as both volatility and volumes ebb and flow, but the prices being quoted will be as close as possible to those being traded by every other market participant, and with no intervention by the ECN broker, either to manipulate or inflate spreads, give you a true picture of the forex market.  As a result, the ECN broker makes his profit from the commission on the trade, and not from adding a margin to the spread, removing the conflict of interest issue, and allowing us to trade in the interbank market at true market prices and in real time. Now of course, there are pros and cons of each type of broker, so let me list them here for you as follows :

Advantages of an ECN broker

  • Trade using the best bid and ask quotes, live and direct from the interbank market
  • Tightest spreads which can be zero at times
  • The ECN broker will not take a position against you, manipulate the price feed or take out your stops
  • The prices quoted are likely to be more volatile and therefore better for scalping strategies
  • Direct access to the interbank market for forex real time trading

Disadvantages of an ECN broker

  • The $orex demotform may be more complex and not designed for retail traders
  • The ECN broker may not provide ‘free’ forex charts
  • There may be limited trading signals and trading tools such as news feeds
  • There is a commission on each trade.

So having looked in detail at the ECN broker, let’s now take a look at the next group which is the true market maker, an interesting contrast to the ECN as we will see shortly!