ECN Forex broker or a Market Maker. This is a question most forex traders battle with. To further the case, the debate as to which of the forex broker models, ECN or a Market Maker seem to be endless. ECN Forex brokers are largely preferred to Market Makers due to the fact that it offers the best forex spreads with any price manipulation. A Market maker on the other hand acts as a counter party to the trades and there fore the spreads displayed by a Market maker forex dealer greatly differs to that of ECN Forex brokers.
In the table below we highlight some major differences between an ECN v/s Market Maker type of forex brokers.
Anonymity of Trading
Unlike an ECN forex broker, a Market Maker dealer knows exactly what your open positions are, your trading strategy and style and can use this to their advantage and is essential as they take counter positions to your trades.
Client – Bank Trading
An ECN Forex broker connects the trader directly to the market participants that include liquidity providers such as banks.
ECN Brokers offer faster connectivity and display the best spreads from the liquidity pool. The price displayed is the price at which your trades will be executed.
Market Makers do not display the available liquidity in the markets unlike an ECN Forex broker.
Counter Party Trades
Market Makers forex model always takes a counter position against your trades. ECN forex model allows for Straight Through processing.
News Based Trading
Most Market Makers do not now allow trading during economic releases. ECN forex brokers are scalper friendly with the exception being that the spreads are much more volatile at such times.
Market Maker forex brokers always offer fixed spreads and do not charge commissions. An ECN Broker charges commissions based on trading volumes and offers the lowest spreads possible.
Market Makers allow trading with as low as $1. ECN Forex brokers require a minimum of $100 to trade with and Currenex Account holders require a minimum of $50,000 as starting capital.
ECN Forex brokers do not offer high leverage that is typical of Market Makers, which could be as high as 600:1. Lack of high leverage isn’t much sought after because besides the potential profits it offers, the risks are just as high.
Given the fact that a Market Maker type of forex dealer is a counter-party to their client’s trades, the Market Maker model is exposed to the market risks. Whilst such risks are well managed by making use of appropriate hedging with a high-tier counter-party, it might not always be the actual case.
Furthermore, even if the risk is well managed with a Market Maker, the risks still loom large. An ECN Forex broker on the other hand does not have to worry about being exposed to the market risks, as they only provide a service for which an ECN forex broker charges a commission. At no point is an ECN broker exposed to market risk and the likelihood for an ECN forex broker to become insolvent is far lesser in comparison to a market maker type of dealer.
Insolvency can cause serious implications for a client’s funds which the broker holds. Most reputable Market Makers however maintains their client funds in a segregated account away from the company’s operating capital to keep their risk management tight. Read more on the advantages of trading with an ECN Forex broker.