Forex (FX) or the foreign exchange trading is a market that is not regulated or traded in any exchange. This means that the prices may vary from broker to broker. There are two types of brokers (i) The Market-Maker and (ii) The ECN (or Electronic Communications Network).
The Market Maker Broker
The Market-Maker broker ‘sets’ or in other words ‘make’ the prices on their system which is based on what is best for them, being the opposite party. The reason for this is whenever you sell, they are bound to buy, and when you want to buy, they must sell to you. It is for this reason, they are able to give you a fixed spread as they set both the bid and the ask price. Many brokers of this type will then try to ‘hedge’ or ‘cover’ your order by passing it on to someone else; though, there are some who may hold your order, and trade against you. This may often result in a clash of interest between you (the retail trader) and the Market-Maker broker.
The ECN Broker
The ECN Broker conversely, pass on prices from a number of banks as well as Market-Makers, and from the other different traders in the ECN, and put on view the best bid/ask prices based on these input. Therefore, there are times when you can get no spread on the ECNs, particularly in extremely liquid currency pairs. The ECN brokers make money by charging you a set fee for every business deal.
The pros and cons of market-maker brokers and ECN brokers are as follows:
• They have more user friendly trading and analysis interface
• Prices are often ‘smoother’ and less unstable than ECN prices
• By and large they will give you free charting software and a news feed
• As they may trade against you there might be a clash of interest between you and them
• The offered price might be worse than what you could get on an ECN
• They will never trade against you. In fact they will pass on your orders to a customer or bank on the other end of the transaction
• They offer better bid and ask prices
• You are offered a price between the bids and ask, with a chance of it getting filled
• Prices may perhaps be more volatile which is often better for scalping
• Often they do not offer integrated news
• Many of them do not offer integrated charting
• Often their trading platforms are less user-friendly