Difference between Market Maker and ECN

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MARKET MAKER:

There exist mainly two types of brokers in the online forex trade market. Those are: Market makers and Electronic Communication Brokers. The first one functions in the manner of setting the ‘bid’ and the ‘ask’ prices on their platforms, and afterwards displaying them on the Quote space. These are the prices at which they trade with their clients.

Now, these exchange rates are set in a way to cater to their (market makers’) interests alone. Though most of them keep the rates reasonable in order to be in competition, they nevertheless try to keep the spreads (the difference between take and stop prices) profitable to them. As the counter-parties to your forex transactions, a lot of them try to hedge or cover your order by passing it on to someone else, or they might even trade against you. There are two kinds of people in this business of market-making: Retail and Institutional.

Features:
  1. You stand to lose more with market makers, since their profit lies in making you lose.
  2. There is a chance that you could get a worse deal. i.e., higher bid/ask prices than what you could get from ECN.
  3. Market makers can manipulate currency prices to run price stops for the client, or hinders the clients’ trade from reaching a profitable target.
  4. Market makers will only leak out negative slippage and not the positive. Their quote screen and order placing can go dysfunctional in times of high volatility.
    1. The trading platforms of most market makers feature free chart-making software and newsfeed.
    ECN BROKER:

    ECN brokers, on the other hand, are completely hands-off. Their main job is to connect you electronically to the liquidity supplier market like Banks and Financial institutions and allow you to do business directly with them. ECNs pass on prices from a variety of entities, and display the most probable bid or ask quotes on their platform screens. Like market makers, ECN brokers are also as counterparties to forex transactions, but the latter don’t trade against you. They connect you to the real market and display you the real trading activities and hence the constantly fluctuating prices of a certain currency pair. They do not set the bids, or take the prices. Their service and role ends with connecting you. And in return, they charge a definite percentage of commission. Since ‘real or ‘authentic’ ECNs do not play any role in the setting of the prices, the risks of price manipulation are reduced by far.

    Just like with market makers, there are also two main types of ECNs: retail and institutional.

    Features:

  5. There is a chance of getting better bid/ask prices since they are derived from diversified sources.
  6. You can trade on prices that have little to no spread.
  7. You don’t run the risk of your broker trading against you, as ECN brokers don’t place bids or stop orders, neither do they have the means to do so. You should, of course, be warned against fake ECN platforms.
  8. Since ECN traders give out both positive and negative slippage, scalpers can benefit hugely from price volatility.
  9. Since you are able to offer a price between the ‘bid and ask’, you can take on the role as a market maker to other traders on the ECN.
This article is shared by Fibo group (fibogroup.eu)
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