Difference between market makers and ECN Forex brokers

Unlike the stock market, The Forex market is not as heavily regulated so don’t be surprised to see different prices offered for the same currency pairs by different Forex brokers. Each broker receives their price form the Interbank market which consists of major banks and hedge funds so the price they offer will vary due to factors such as relationships with those banks/hedge funds, the broker’s financial stability and length of relationship to name a few.

Market Maker Forex brokers

Whilst there are legitimate market makers out there, you need to be a bit more vigilant when you look for one for the purpose of Forex trading. They tend to ‘make’ the price themselves rather than have a regulated price offering across the board. For example, if they receive a spread of 1 pip from the various banks and hedge funds in the Interbank market, they can charge you 2, 3 or even 4 pips if they wish. There is nothing you can do about this. They can also close any buying or selling during high volatility/news announcement times of the day or simply make the spread so wide that it is not worth getting into the market whatsoever. Unfortunately, these are the strategies they use in order to continually make money. However, if your Forex trading is technical and you do not trade the news this is of no concern. One element that is a concern is the sudden market spike. You will see these regularly, especially towards the end of a trading session. Their whole purpose is to take out your stops.

On the flip side, market makers only require a small deposit in order for you to start your Forex trading. Some even require deposits as low as $25 but the average is around $100.

ECN Forex brokers

These types of brokers have direct access to the market. That is, they still receive the same Interbank prices as the market makers but they don’t add extra pricing. If they receive a 1 pip spread from the Interbank market, you will receive a 1 pip spread for your Forex trading.

As this is the case, the only way they can make money by providing this service is to charge a commission fee. They can be slightly higher than market maker fees but depending on your trading volume or capital credited, you can negotiate this down. You can also do a bit of shopping and ask the ECN broker to match or beat another broker’s commission costs.

The one negative aspect of ECN brokers however, is the trading platforms they use. Admittedly, they are getting better but they tend to be so big and complex that it is easy to get lost in them. As with anything though, experience and time will make this easy at some point so be prepared to put in some screen time.

To conclude, you may be limited to your choice depending on how much capital you have to invest or time you are willing to give to learn to operate large trading platforms. Both types have positives and negatives so you should always do your research first before committing to anyone.