ECN's VS. Market Makers

Before we tackle this subject I want to address something that really annoys me in this market. This thing is people complaining about their brokers stop hunting (if you don't know what this I explain it below) and doing various other ethically questionable things. What they need to realize is brokers are companies and a company has to turn profit to survive. They are not going to come to you and say "Bob, we feel like giving away some money today so feel free not to trade safely, feel free not to employ some common sense..."

Your broker will never be fair because all you are to them is an extra few dollars for the proverbial piggybank The sooner traders realize this, the sooner they can get over it and start trading. Also, a little bit of common sense goes a long way. You can counter most, if not all, of your brokers' attempts to take more than their fair share.


What Are Market Makers?

Market makers have gotten a bad rap in the last few years; they have become known as the soulless bad boys of the Forex world and let's face it: they are. Instead of giving you direct access to the actual interbank Forex market, the market maker creates its own market based on the actual prices of the actual market. They stand ready 24/7 to make transactions at these prices with their customers. As counterparties to each Forex transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa. Basically they create a market, and if you lose, they win. They stay in business because 95% of traders lose.

Sound bad? It gets worse.

For the broker, it's not enough that overzealous traders who do not bother to educate themselves on how to trade lose automatically. They sometimes decide to speed things up and make traders lose. They do this through Stop Hunting. When a broker stop hunts, they drive the price in one direction a little further than it actually went on the real market. In doing this they take out a lot of stop losses that in reality should not have been taken out. If you are aware of this, it is easy to counter. Read the counter attack section to find out how.

Pros:

1. They often have much better trading platforms

2. They are more newbie friendly.

Cons:

1. Stop hunting

2. Often have larger spreads

3. During volatile times you may find it hard to enter a trade as they delay the trade execution.

4. In a volatile market you may get slipped.

5. Market makers hate scalpers because they get in and out of the market real quick and the market maker has no chance to make an extra few dollars off of them. For this reason they place scalpers on lists that delay the entry time. So by the time they get into a trade, the market has already moved a few pips and the scalp becomes a little harder.


What Are ECN's?

Electronic Communication Networks (ECNs) basically bring buy and sell orders together. Where the market maker buys when you sell to cover the position the ECN just finds somebody that's buying to cover your sell and you cover their buy. It is that simple and it works very well. To make money, they charge you a set commission for each trade. You will find most charge about 1-2 pips per lot for a trade. The good thing is the spreads are usually much lower so the spread plus the commission is often lower than most market makers spreads. The problem is the spreads are not fixed and during volatile times like news releases you can see spreads widen to 10-15 pips on pairs that are usually 2 pips. ECN's are best.

Pros:

1. Generally speaking you will have lower spreads sometimes as low as 0 pips

2. ECN's do not trade against you. They just match your trade up with an opposite trade.

3. Since they work on commission, the better you do the better they do. With market makers the worse you do the better they do.

4. ECN's do not hunt stops or manipulate prices.

Cons

1. Platforms are usually not as user friendly.

2. Since the spreads are not fixed they can widen greatly when the market is volatile

3. You have to pay commission on each trade.


So who should I pick?

That is up to you. They each have their pros and cons so it depends on what you are looking for. If you want an easy to use platform and fixed spreads go with the market maker. If instead you want faster execution and no stop hunting go with the ECN. Only you can decide but decide carefully. I already mentioned your choice in broker can make or break your career.