ECN or a market maker forex broker?

What is an ECN/STP Broker?


Last years the number of ECN/STP forex brokers (Electronic Communication Network/Straight Through Process) has exploded, and it seems that everybody wants to trade with an ECN broker nowadays.

ECN brokers are those that send your orders directly (apparently) to the international Forex market. Their platforms are connected to one or some of the main liquidity providers, banks, and big financial institutions. What these ECN brokers do is to send your order to their liquidity pool and take the best price available. This is supposed to eliminate the potential conflict of interest between the broker and the customer as it may happen with market maker brokers. Although, we must separate the wheat from the chaff. Not all market makers are bad, and not all ECN brokers are good.

Market makers are those brokers where our money stays in the house. What is to say; the other side of the trade is usually taken by the broker, when they have no other customer to match the trade. This broker has some liquidity and price providers and charges a spread to its customers. As most customers lose, the market maker makes a good living out of it, and so they grew up so much the last twenty years. In their beginnings, some market makers did some strange practices, like stop hunting and many re-quotes. That is because when they start, they have a weak financial position and count on their customers losing at the “appropriate” rate to maintain their operational expenses. Some are just greedy.

There are a lot of brokers that pretend to be ECNs, but what they really do is to pass the orders – some do not even care about that – to another market maker. So the problem is still there. There are sometimes when the “market maker” and the ECN broker belong to the same company.

That said, it seems that market maker brokers are very bad, but nothing is further from the truth. In fact, some of the best forex brokers today are market makers, and without a doubt some of the safest. Saxo Bank, FXCM, Oanda, Alpari, etcetera, are all market makers, and yet I think that we cannot say they are bad brokers. Those giants move billions of dollars every day and do not really need of bad practices to steal their customer´s money. Their customers make sure to take care of themselves already by trying pathological day trading practices. Nonetheless, those big names also offer the possibility to trade in ECN environments (like FXCM ActiveTrader, Alpari or SAXO DMA).

The most important fact about this issue of ECNs and market maker brokers is something different, like broker’s regulation; world reputation; security of funds; if it has an office in our country; etcetera. In that regard I would rather open an account with one of those market makers than with an ECN from Cayman Islands or Panama, however spreads they offer. In fact, some of the worst slippages I experienced was with an ECN broker that despite its great spreads, had terrible and common slippages of 2, 3, 4 and more pips.

In any event, a good ECN broker is what a professional trader should look for. A broker that works as well as a futures broker does. Even in the stock or futures markets, there is no way to prevent “stop hunting”. “Market makers” are everywhere and there are big institutions that know where the majority of stops are, and proceed accordingly wiping out a lot of small traders.

So it is very difficult to escape the great sharks of the industry. That is why small traders should make things difficult for them. And the best way to do so, is to trade less and with wider stops; that is to say, doing trend and swing trading. Market makers, ECN, STP, or whatever brokers rub their hands when they see people doing day trading.


P.S. This is a personal translation from my spanish blog

Thanks for reading and sharing.