For someone new to the forex industry, it is vital to understand that the forex market is a competitive marketplace as there are thousands of brokers trying to attract clients by giving claims they might or might not be able to fulfill. But here comes the most common question: Are all brokers equal? Read More
A widely used broker that you see in the markets is a market maker. They focus on retail traders and take the opposite side of the trades. Thus, when a trader chooses to deal with a market maker, he/she are not competing with other traders or participants; you are actually trading against the forex broker.
In addition to making money by making their clients lose money, market makers also charge huge mark-ups on spreads for their clients. Generally, their spreads are ten times more than spreads offered by other brokers in the forex market. Although they don’t charge a commission, the spread markup is enough to make it the most costly alternate to trade.
Another remarkable feature of market makers is that they execute all their trades via a dealing desk. Furthermore, there have been instances when market makers use unethical tactics to keep an upper hand over the clients.
Straight Through Processing (STP) Brokers
STP brokers never take a side opposite to your trades. Furthermore, the trades are straight away passed to the forex market. Thus, when a trader deals with an STP broker, he/she trades against institutional participants in the forex market. Unlike market makers, STP brokers and their clients have no conflict of interest. However, they do mark up the spreads, but it is much smaller than a market maker.
Another benefit of STP brokers is that their accounts are commission-free. The traders who are frustrated by fixed commissions charged by their current brokers can indeed benefit from STP brokers.
Overall, the STP execution model is quite satisfactory. It is quite cheaper when compared with the market maker model, and there exists no conflict of interest between the broker and trader. Various ECN brokers also provide traders with STP accounts for traders who can’t afford high commissions.
True ECN Brokers
True ECN forex broker is the best trade execution model for professional forex traders in the forex market. Typically, ECN refers to Electronic Communication Network. Although this particular model was initially designed to cater to the equity market, it has made a significant place for itself in the forex market in the recent years. The ECN broker is quite similar to the STP broker in the following two ways:
- ECN brokers don’t take the other side of the trades.
- There arises no conflict of interest when the trader deals with an ECN broker.
So, what makes the two different from each other? Of course, the price! True ECN brokers never mark up the spreads at any cost. If you find any broker claiming to be a true ECN broker marking up the spreads, it’s a complete red flag! When you deal with a true ECN forex broker, you tend to take advantage of the best available price in the forex market.
ECN brokers do not mark up the spreads; therefore, they charge commissions and fees. But even if you add their commission and spread together, you will end up paying much less than what you would pay to a market maker or an STP broker. Thus, the ECN execution model is one of the most cost-effective models for traders.
ECN brokers are especially the ideal option for automated forex traders because every point counts to your trading success if you trade big or run an automated system.
Out of the three models mentioned above, ECN is considered the best because of its effective pricing and lowest commission. However, it is vital to choose a “true” ECN broker as many brokers in the market claim to follow the ECN trading model, but in reality, they are market makers. The above discussion clearly explains how you can differentiate between the three and not fall prey to scam brokers claiming to be something they are not.