E ECN VS Market Maker

When looking for the right forex broker you're most likely going to bump into two types of brokers - ECN brokers and Market Maker brokers.

Those two types of brokers use different systems to display their quotes, and if you want to succeed in forex trading, it's essential to understand both of them.

ECN

Electronic Communications Networks system is a system that collects bids and asks from everyone who is connected to the same system, individual traders and huge firms as one. Then, the ECN system will display the best quotes it has, without any preference. The role of a broker that uses an ECN system is only to provide the trading platform, once the trader is connected, the broker does not interferes and just provides support if needed.

Market Maker

As you can probably understand from the name, a market maker broker makes its own market. A market maker follows the movement of the market and presents the bid and ask as he sees right. Although it might sound bad, just a few years ago that was the only way to trade forex. In fact, even today, every time you exchange currencies you use a market maker - your local bank.

Spreads

The bid and ask displayed in an ECN system depends on the traders' demands so they change all the time, therefore the spread is variable and when demands are low the spread widens.

A market maker controls the bid and ask, therefore he is able to offer the traders a fixed spread. This fixed spread will stay the same during the whole trading session (except for rare circumstance).

In order to maintain a fixed spread the broker may have widen it; as a result, the fixed spread is significantly bigger than the variable spread.

With whom should you trade?

Trading with an ECN broker means that you are trading against other traders without knowing who is on the other side. For you the trader, it is more significant to have the best quotes than to know whom did you sell your position to.

Trading with a market maker means that you trade against your broker. For example, if you open a long position on the EUR/USD your broker is the one who takes the other side. In some cases, your broker will decide to keep the opposite position and in some he will hedge the position by selling it to someone else.

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