All players on the forex market trade through an interbank market where all transactions are conducted, even the ones by the large world banks. It must be noted that only the banks on the interbank network are able to access the market. Retail traders will be required to work through forex brokers.
There are presently two different types of forex brokers available to an individual trader, the market maker and the electronic communication network (ECN) option. It is vital you have an understanding of what these brokers do, how they operate and how they can benefit you as a trader. Without this knowledge you may be subject to a scam broker or exploitation within a registered one.
Marker maker forex brokers
The market makers are forex brokers who set their own purchase and selling prices based on their own interests. The currency prices they display are those they would like to trade on behalf of their clients. The spreads offered by these forex brokers are normally reasonable due to the competition between brokerages on the market.
Market makers can be subdivided into two categories, the institutional market maker and the retail market maker. It is rare that the institutional type will work with a retail trader as they generally offer their services to larger corporations, banks and governments. It is the retail market maker that will offer its services to the smaller retain trader.
The advantages of using a market maker forex broker are the trading platforms. This broker will generally offer sophisticated platforms featuring built-in forex news feeds and charting software. The platforms are also more user-friendly than others. Another benefit is that the currency price movements offered are often less volatile reducing the amount of risk in trades.
As advantageous as the market maker may sound, there are various drawbacks. One drawback is that the market maker may have a conflict of interest when executing your trades. It has been seen that this type of forex broker may trade against instead of for you. Furthermore, they will present with higher spreads than other brokers. Greater amounts of slippage are also present, along with trading software that has been known to freeze during highly volatile forex market conditions. Experienced scalpers will recommend avoiding this type of broker as their offers can be damaging to a scalping strategy.
ECN forex brokers
The electronic communications network (ECN) forex broker does not set the prices at which he trades but rather gathers the currency prices from a number of banks on the interbank network. This is beneficial as it reduces the risk of currency price manipulation as may be seen among market makers. Unlike the market maker forex broker, the ECN brokers do not earn their fee via a spread. Instead this brokerage charges a commission per transaction. When choosing a broker you should examine which payment schedule would be most suitable for your trading style.
The ECN forex brokers can be divided into two types, the retail and the institutional broker. The institutional broker relays prices gathered to banks and large companies, whereas the retail ECN broker relays prices to the retail trader.
The advantages of working with an ECN broker is that they will not trade against you as there is no conflict of interest. This brokerage is also more suited to scalping strategies as the currency prices offered are more volatile.
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