In this post I want to talk about different types of brokers- mainly Market maker brokers and ECN brokers .
It is very important for new traders to understand the difference between the two before opening a live trading account.
1) MM/DD brokers
MM stands for “Market Makers” . These brokers are also know as Dealing Desk Brokers. These brokers display their own quotes and do not reflect the real market directly. They create market for their clients, meaning these brokers don’t take part in the interbank market, therefore they are able to set their own prices, they cover the orders internally with their own liquidity.
How market makers make money
They make money from charging their clients”Spread”
Market makers may trade against you which means
they buy when you sell and they sell when you want to buy.
when you lose, they make money and when you win, they lose money.
These brokers survive for years because they make a lot of money since more than 90% percent of new traders lose money anyway.
Pros and cons of mm brokers
- Prices are less volatile when comparing them with the ECN brokers.
- They provide user-friendly trading platforms.
- They often offering bonuses.
- Most of them offering lower minimum deposits compered to ECN brokers
- They also provide free training sessions.
- They may manipulate the prices and trigger your stops or prevent you from reaching your target profits.
- The prices they offer may be worse than ECN brokers.
- Huge slippage of prices usually occurs during major news events.
2) ECN/ STP Brokers
ECN stands for “Electronic Communications Networks” and STP Stands for “Straight Through Processing” – unlike market makers, these brokers don’t have a dealing desk, they connect their clients in the interbank system where they can trade with other individual traders , hedge funds, banks and other trading institutions.
How ECN/STP make money
Unlike makert makers, A true ECN Broker only make money by charging commotions and not by trading again their clients or from spread.
ETC brokers want you to win, otherwise there will be no commission to earn, which means there is less reason for them to use any unethical price manipulation tactics.
Pros and cons
- You need to pay a commission or markup.
- Most do not offer trading platforms like MT4.
- Most do not offer integrated news.
- Usually you need quite a big initial investment to open an ECN account, however there are brokers out there that let you trade with.
- Fast execution
- Deep liquidity access
- Lower spread than these of a Makert Maker.
- Prices may be more volatile which is good for scalping.
- They will not be trading or having any position against you.
- You can get superior bid/ask prices because they come from several different trading institutions.