Types of Forex Brokers: ECN v Market Makers
There is one last need to know before you take the plunge and open a live account with a forex broker such as Vantage FX, and that’s what type of forex broker you are dealing with. All brokers are definitely NOT the same and this final lesson is here to guide you through the different business models that forex brokers run.
There are two main types of forex brokers who offer traders access to the forex market using completely different business models, those being ECN and a Market Maker.
Trading with an ECN forex broker such as Vantage FX means that your interests are aligned with those of your broker. An ECN forex broker passes your order through to liquidity providers or the interbank market, meaning your trades are actually being matched with other traders in the real market. They make money on the spread, meaning that they want active, profitable traders that will keep coming back for more.
ECN forex brokers aggregate a list of all the best bid and ask prices from liquidity providers (usually major banks and financial institutions) and match trades with the best possible prices and lowest possible spreads without considering the source. An ECN forex broker can be seen as a middle man between buyers and sellers with no interest in manipulating prices.
On the other hand, if your broker is a Market Maker, your interests are NOT aligned with those of your broker. A market maker is essentially a bookie taking the opposite side of your trades. You are trading against them. When you open a position, they are the counterparty to your trade. Market makers want losers. They want you to lose so they can pocket your account!
Think of a market maker as overlaying their own market on top of the real market. Your orders never actually reach the real market and you are only taking bets on an overlay that the market maker has provided for you. This is where price manipulation and stop hunting can and does occur.
Trade with a reliably regulated, ECN forex broker. Trade with the regulated, ECN Forex broker, Vantage FX.