Forex trading is a special kind of trading. It does not occur on a regulated exchange, like for example shares, but takes place between buyers and sellers from all over the world through over-the-counter (OTC) market. And in order to access this market, you need a broker.
Since OTC market is not centralized, the exchange rates and trading conditions are heavily impacted by the type of broker you select. It makes choosing the right one a big decisioninfluencing on the success or failure of your Forex trading.
Therefore, you should not make this decision carelessly.
There are basically two types of brokers that are predominantly different kinds – ECN (like for example IC markets) and Market Maker brokers (for example BNP Paribas).
ECN broker
ECN stands for Electronic Communication Network. ECN brokers provide their traders with direct access to other market members using interbank trading prices. Such a network enables sellers and buyers to find a counterparty of their trading positions.
Since ECN brokers use different liquidity providers, they are able to provide their clients with prices from these providers to compete in the same actions. It means that Forex traders get more beneficial prices and more economical trading conditions.
Moreover, ECN brokers allow their customers to trade in more effective and transparent environment and they make revenue by charging a defined commission on every trading position (for example IC markets provides customers with information about commissions on their site).
Market Maker
According to its definition, Market Makers are brokers that “make” the markets by setting the ask and bid prices using their own systems. Once they do this, they display the prices on their platforms enabling investors to open or close their trading positions.
Unlike ECN brokers, Market Makers don’t hedge their customers positions with other liquidity providers, but pay those winning ones funds from their own accounts. In other words - it means that once a customer wins, Market Maker loses.
Then - which one to choose and why ECN broker?
Choosing an ECN broker instead of a Market Maker comes to mind itself resulting from the fact that, unlike Market Makers, ECN brokers will never trade against their clients.
ECN brokers play only the role of intermediaries between selling and buying orders. Since they make money out of commissions, they will never bet against their clients.
What is more, using services of ECN brokers, like for example IC markets, provide clients with more favorable trading conditions and better transparency of trades what should also be taken into consideration.
