Market Maker vs ECN – Know the Truth!

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, every time they sell, the market maker buys from them, and vice versa.

Market makers set rates that are beneficial to them making a profit from the spread charged to their clients. Some of them give fixed prices making it seems safer for the customer but find other ways to manipulate, like freezing the platform when financial news comes in or by increasing their spreads significantly. 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.

Advantages:

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.

Disadvantages:

Their disadvantages, on the contrary, are a lot more from 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 comes 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 pairs trading activities.

You are probably thinking what is the catch? Why are they offering so low spreads and how do they make the profit? The way ECN brokers make money is by charging customers a side commission for each transaction. For example, you might get a spread from 0 pips on your ECN account plus a $30 commission per million traded 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.
Advantages :

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.

Disadvantages:

There are no major disadvantages with an ECN broker, however, you might find their trading conditions a little bit difficult because the spreads are variable and they do charge a side commissions per side per lot. But, they do not charge any hidden commissions, that’s the most positive feature of a true ECN broker.