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ECN Broker vs Market Maker:
advantages and disadvantages for trading
ECN brokers in forex: is it better to trade using an ECN forex broker or is it better to use a Market Maker forex broker? We are going to list the advantages and disadvantages of ECN brokers, trying to understand what an ECN broker is, how it works, and in the end, whether it is better to choose an ECN broker over a Market Maker broker to trade on the forex market. After all, choosing a forex broker is a crucial step for every trader.
Let us therefore start with the respective definitions of ECN broker and Market Maker broker as far as the forex market is concerned. Private traders in fact have access to forex brokers that fall into these two different categories.
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An ECN (Electronic Communication Network) broker is a broker that provides its customers with direct access to the forex market via a network consisting of other ECN brokers, but also Market Maker brokers, as well as banks and institutional investors.
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A Market Maker broker (often abbreviated to MM) is a broker who, as the name suggests, 'makes the market' himself for his clients. This means that the broker creates a kind of 'parallel market' to the real one, in which traders can buy and sell (and where the Market Maker always takes the opposite position of the trades: i.e. if a trader sells, the Market Maker must buy from the trader; if the trader wants to buy, the Market Maker must sell)
These two types of brokers are very different and have advantages as well as disadvantages. Between an ECN broker and a Market Maker broker, the relative costs and commissions for individual transactions in the forex market also change.
How an ECN broker works
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As we have just said, an ECN broker simply 'connects' its customers' orders to those of the forex market, in a network where other brokers, both ECN and Market Maker, as well as banks and institutional investors participate. The biggest advantage of an ECN broker is that the bid/ask prices reported for each currency pair are the best ones taken from the entire network to which the ECN broker is connected. This means that the spread offered by an ECN broker is definitely lower than that offered by a Market Maker.
On the contrary, in certain market phases with high volatility and very liquid currency pairs (like EUR/USD, GBP/USD, USD/JPY), it may even happen that the spread is absent. For this reason, the type of spread offered by an ECN broker is variable and not fixed. Thus, the ECN broker is forced to charge a commission for the opening of each trader's trade in order to earn money.
An ECN forex broker therefore does nothing more than connect its clients' orders to the orders placed in the network by other brokers (i.e. by other traders). For this reason, ECN brokers do not apply price manipulation and cannot tradeagainst their clients (i.e. they do not have to open positions in the opposite direction to their clients, as market makers have to do). With ECN brokers there is therefore virtually no risk of 'conflict of interest' between the broker and the traders.
Moreover, ECN brokers also allow after-hours trading, thus facilitating trading for those traders who cannot trade during normal market hours. Another advantage of ECN brokers is that orders are entered into the market anonymously: no one can therefore trace your buy or sell order (thus an excellent level of privacy is guaranteed).
On the other hand, ECN brokers may require more capital as a minimum deposit to start forex trading, although this depends from broker to broker. And one should not forget that the ECN broker's only task is to execute the trader's order at the best market price. This means that if everyone is selling a certain asset, and only a few are buying it, it is possible that some traders' sell orders will not be executed immediately. Or at the very least, not at the price the trader wanted. For this reason, a true ECN broker cannot offer guaranteed stop losses: it all depends on whether there is someone on the other side of the market who has placed an opposite order to the one placed by us.
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Advantages of an ECN broker
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So let's summarise what advantages a trader gets when he decides to trade using an ECN broker instead of a Market Maker broker.
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Reduced or no spreads: As we have explained, ECN brokers only deal with connecting the trader's orders to the forex market, trying to execute the orders at the best price offered by the market. With highly liquid currency pairs (such as EUR/USD or GBP/USD or USD/JPY) it is also possible to not even have to pay the spread, as it is absent.
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Direct access to the forex market: This results in no risk of conflict of interest. The ECN broker does not have to open opposite trades to those opened by its customers, and therefore has no reason to manipulate the prices offered to its customers, as these are those from the market.
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Speed of order execution: With ECN brokers, the execution of an order is practically instantaneous, as it is a network into which the orders entered by brokers, banks and traders are connected.
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Scalping allowed: ECN brokers do not impose any restrictions regarding scalping, so traders who engage in this type of trading will not have any problems (also because there is no price manipulation and spreads are minimal if not absent).
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Guaranteed privacy: ECN brokers can guarantee a high level of privacy to their clients, which is certainly higher than that of Market Makers.
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Possibility to trade After Hours: Thanks to the ECN broker network it is also possible to trade after market hours.
Disadvantages of an ECN broker
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Once we have seen the advantages of trading with an ECN broker, let us instead look at the disadvantages and related risks faced by traders who decide to trade forex with an ECN broker.
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Commissions: An ECN broker has to charge commissions for traders to open every single trade, as the spread is very minimal if not absent.
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High minimum required capital: Usually a higher amount of money is needed to open a forex trading account with an ECN broker than to open a trading account with a Market Maker broker, considering that the minimum lot size offered is 0.1 (i.e. 10,000 units).
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Lower offered leverage: ECN brokers offer lower leverage than Market Maker brokers. Another reason why you need more capital to start trading forex with an ECN broker.
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Higher complexity: Trading with an ECN broker is not as easy as it may seem at first glance. Even the trading platform itself is often not suitable for inexperienced traders, as it has many advanced features and a look that is certainly more professional than user-friendly.
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Risk and stop loss not guaranteed: As you have well understood, the ECN broker does nothing more than connect our orders to other orders on the network in which other brokers, banks and institutional investors participate. This means that if there is no one in the market ready to buy (for example) at our price, our order will be executed at the next best price. This waiting can obviously generate losses or limit profits. Such a scenario can only occur when there is no counterparty ready to match our order: it is a rare event, but not impossible.
As you can see, there is therefore a conflict of interest: the broker's gains are also derived from its clients' losses. This is why repricing episodes may occur, or during certain phases of high volatility, spreads may be increased to limit traders' gains. On the positive side, however, are the low capital required to start (often around €100 or €200) and the possibility of using trading platforms built to be user-friendly, even for those who have never traded before.
Of course, this does not mean that Market Maker brokers are dishonest and only aim to cheat their customers: if that were the case, these brokers would have closed their doors long ago! However, you have to be aware of how the Market Maker broker takes 'home' its earnings: i.e. also from your losses. Consider that the vast majority of forex brokers are Market Maker brokers, and there are millions and millions of traders who use them without having any problems.
Furthermore, remember that many Market Maker brokers often provide trading platforms that are also suitable for inexperienced traders and all those who want to approach the world of online trading. These are trading platforms that are easy to use and also offer the possibility of a demo account. By demo account we mean an account with which you can trade online without risking your own capital, but using virtual money - a great way to practise in complete safety.