There are normally two types of brokers who you’re going to find in the foreign exchange market. Their names are: Market makers and ECNs. The first variety is also known as the “Dealing desk” type of brokers; establishments or individuals who act as counter-parties to their clients’ trade and try to earn profits by reversing any profits the clients might have made. They seldom (most of the times they do not) connect the broker to the inter-bank or liquidity provider market. Instead, these brokerages prefer to keep them confined inside of their own pool of liquidity. They fix the “buy” and “sell” prices at a place where they’re willing to engaging in buy and selling of currencies. Majority of the times, the clients are unprepared to accept their terms of trade, and hence, they (the brokerage) have no other option but to resort to trading against the client. So as you can see, it doesn’t take a lot of brain power to figure out why they enjoy less popularity in comparison to the ECNs. Now the question may arise: what exactly are ECNs? Read on for the answer.
The ECNs are the polar opposites of the market makers or dealing desk traders. They are in fact known as “No Dealing Desk” brokers. In a stark contrast to market makers, the ECNs don’t interfere at all in trading. Instead, they connect their clients to the inter-bank market, and charge a small payment as down payment for registration. They do not trade against the client. They put on display live charts and price and exchange rate movement. Here the traders freely compete against each other in a direct manner, without the presence of any middleman creating channels or intermediate connections. These platforms reap profits regardless of a client’s gains or losses in a trade. There is a fixed percentage of the profit which the brokerage charges as commission, but there is no interference in the trade at all. (Information collected from www.cornertrader.ch)
In contrast to market makers, ECNs do not have any prescribed limit as to the minimum spread or lot number which a client is allowed to trade. It preserves the trade safety and complete privacy of their clients, and allows them to trade without actually revealing their real identities in the market. A trader can trade in the market with nobody being able to detect his or her trade in the market. Another great advantage is that, it does not require a trader to take breaks and analyse before preparing for the execution of the next trade order on ECN brokerage platforms, such as MetaTrader or cTrader. And besides that, it is completely possible for a trader to execute one trade after another, while simultaneously receiving bank updates and financial news which is of importance to trading or currency values. Therefore, trading on any ECN brokerage platform assists the trader in saving a lot of time and generates more profits.
Another very big advantage of trading through ECN is that, there is scope for enhanced execution of trade orders, after the trader places orders on the market. So, it’s not difficult to guess why most people prefer ECNs over Dealing Desk/Market Maker brokerages.