This topic (market makers vs ECN’s) is constantly discussed by traders. In this article, I am assuming that you have basic knowledge of how brokers and the Forex market operate.
Most new traders start out trading with market makers, because of the minimum account size required to trade with an ECN broker.
ECN brokers require a higher minimum account size, because ECN’s typically make money on trader’s commissions only.
Lower operating costs, along with the added transparency of an ECN, make this type of brokerage seem appealing.
Many traders believe that moving to an ECN broker is simply the next step in the evolution of their trading career, but are ECN’s all they’re cracked up to be? Are there any advantages to using a market making brokerage?
Market Makers Aren’t As Evil As You Think
With market makers, there is typically a step or two between the community of banks and the trader. Sometimes this can be a good thing.
Funneling price through market makers has the effect of lowering volatility; depending on how you trade, that can be an advantage or disadvantage.
Market makers are the counter party to all of your trades; meaning they typically make money when you lose money. This often causes suspicion of stop hunting among other things, as it well should.
When you trade with a market maker, your entry point, stop loss, and take profit levels are always visible to your broker, and usually to its liquidity providers as well. Stop hunting can and does happen every day.
ECN’s Have To Be Better, Right?
As stated earlier, the main attraction to an ECN style broker is transparency. Some traders might be initially drawn by the attractive spreads that ECN’s can provide, but the real advantage is the added transparency.
I say added transparency, because even ECN’s aren’t truly transparent; that is to say, unless you have access to the price feeds.
Although there are clear advantages to trading with an ECN style broker, you may run back to your market maker broker after learning about some of the disadvantages.
Yes, there are disadvantages to ECN’s as well. Some market making brokers guarantee no negative balances, but you will not find an ECN broker that can offer the same.
Likewise, market makers can provide guaranteed stop losses; ECN’s cannot not do the same. I’ve heard of traders losing thousands because of missed stop losses.
Lastly, you will not find an ECN broker that offers fixed spreads. This can be a real disadvantage for certain scalping techniques, or if you trade odd hours. Many times fixed spreads are better than interbank prices.
So, Which Is Better: ECN’s or Market Makers?
By now you should have a better understanding of the advantages and disadvantages of ECN and market making brokers. It is generally taught that active, experienced traders and scalpers will be happier with an ECN style broker; while new traders are most likely better off with a good market maker.
If you are comfortable trading without the safety features and lower volatility provided by market making brokers, then you’re better off with an ECN. If you’re starting with a small account size, or simply want to trade with a fixed spreads, you’ll be better off sticking with a market maker.
Only you can determine which type of broker is right for your trading style and level of risk tolerance. It all really comes down to your own personal preferences and trading method in the end.