Comparing Market Makers and ECNs

Comparing Market Makers and ECNs

Submitted by adil on Tue, 06/03/2014 - 18:06

What Are Market Makers & ECN's?

FOREX trading is conducted openly resulting in different FOREX rates at different brokers. For retail traders there are two choices to select a broker: market makers or Electronic Communication Networks. Following review will help you in choosing the best one.

Market makers:

Market makers establish bid and ask prices according to their own interests. They are ready to trade with both banks and retail FOREX traders. Market makers have to buy or sell with the traders, so they always set selling price more than buying within a reasonable spread. The increased competition between various market makers helps to keep the ask/bid prices in check.

There are two distinct types of market makers:

• Institutional: These include the banks and large companies that only trade with banks, ECNs and retail market movers.
• Retail: These brokers offer FOREX trading services solely to individual traders.

Why to trade with market makers:

• Market makers offer many complimentary services such as charts, analysis tools and news feed.
• The trading platforms have very good design for comfortable trading.
• The price movements of currencies are more stable when trading with market makers.

Why NOT to trade with market makers:

• Market movers hold the right to trade in the same market as you and this empowers them to trade against you.
• They may provide inferior ask/bid quotes as compared to other market movers to gain more profits.
• The market movers can manipulate the market prices of a currency that can harmfully affect your trades depriving you of profits.
• You may not be able to make more profits in volatile market conditions as a market mover may temporarily freeze the ability to place orders to safeguard their own interests.
• News releases can cause significant changes in market. Market movers also discourage scalping techniques.

Electronic Communication Networks:

ECNs do not set the ask/bid prices of the FOREX currencies. An ECN gathers prices set by banks, market makers and different traders connected with it, and picks the best possible ask/bid quote to show on its trading platform. Instead of performing actual trading, ECNs participate passively in the currency trading by charging fixed commissions on each transaction made by the trader.

Just like the market movers, ECNs are principally of two types.

• Institutional: Institutional ECNs gather price data from different institutional market movers and provide it to other organizations including large banks and corporations.
• Retail: These ECNs offer FOREX trading quotes gathered from banks and other traders only to individual retail traders.

Why to trade with ECNs:

• Traders usually get better quotes from ECNs as compared to market makers. There is also reduced risk of price manipulation.
• On currencies with high trading volume, traders can trade with very low or even zero spread.
• You can become a market maker for other traders on an ECN.
• The prices are more volatile, which provides opportunities of high profits and scalping.

Why NOT to trade with ECNs:

• Lack of proper charting and news feed services.
• Traders have to pay for each transaction.

As prices are controlled by external forces, it may be difficult to predict future trend.