Forex Trading - Market Maker or ECN Broker
In forex trading there
are two types of brokers out in the forex market. 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 or the liquidity providers. This way they
can eliminate or earn the spread.
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