What’s the Difference In the middle of a Market Maker and an ECN?

Market maker or ECN is the single most critical distinction between FOREX broker-dealers. A market maker, or dealer, is always the counterparty to your trades; an ECN requires an actual counter order for execution. Given the liquidity of the FOREX markets, a counter order is only a problem in a very fast or very slow market or if you place an extremely large order. An ECN cannot play many of the games that market makers do -- in large part, they do not need to because they have no book to balance. But ECN trading also requires a more accurate and delicate trading touch -- an additional skill that the trader must acquire.
Regarding market makers: some are good, even very good; many are awful.

Keep in mind what counterparty to your trade means. Then remember that market makers hold all the cards -- the data stream, the dealing desk, or control through their liquidity providers with an NDD (no dealing desk), the trading platform, and all the tools -- requoting, pip spreads, trading rules, dealer intervention, accepting or canceling trades -- all for the supposed purpose of maintaining an orderly market. National Futures Association (NFA) Compliance Rule 2-43 has minimized some of these factors -- but not eliminated them by any means. Progress is being made but continued excesses will make them the dinosaurs of the industry.

ECNs have their own issues -- In fast or slow markets, liquidity may actually be worse with an ECN because they do not have many of the orderly market tools at their disposal. But on balance, I feel that once you have gotten your feet wet in FOREX, shop for an ECN. Several retail brokers are offering ECN trading even to mini-accounts. How they bundle 10k lots into a 250k bank lot without intervention, I have not fully determined and, quite honestly, probably do not want to know.

The core issue -- and the reason the author predicted in the second edition that market makers would lose ground to ECNs -- is that market makers manipulate the books to maintain order. This involves a number of activities such as requoting, dealer intervention, and setting pip spread -- as and when they please. Market makers trade against their customers -- it is why and how they are what they are. A profit for you may well be a loss for them. What would you do with a customer who cost you money on a consistent basis? ECNs may also act as a counterparty. But here -- at least in theory -- it is supplemental to their primary duty of trade matching.

Market makers set, manipulate, or control pip spreads, usually as legitimate operations of the market-making process to maintain an orderly market; ECNs generally do not. Many trading platforms -- both market maker and ECS -- provide depth of market: the ability to see standing buy and sell orders, and the quantities and prices bid and asked. This can be valuable information if you learn how to use it properly.

To complicate matters, some firms that are obviously market makers now advertise a no dealing desk. The author is unsure how such a hybrid operates; in some instances, it appears to be nothing more than semantics in an effort to shake the market-maker moniker. Lack of regulation makes knowing how a broker-dealer processes trades difficult, if not impossible. The author queried five such brokers about this process and received no response from four of them and what can only be described as mumbo-jumbo from the other one. More and more brokers are attempting to distance themselves from the market-maker label, but whether they are actually making any significant changes to how they execute trades remains a question in many instances. All of this said, if you like to trade the minor or exotic currency pairs you will probably get a better deal from a reputable market maker than and ECN. The market maker provides liquidity to these pairs that are many times not available to the trade-matching ECN.

You will hear the term liquidity provider from both ECNs and market makers. For a market maker, it really has little meaning but it sounds good. It does not matter how many liquidity providers a broker-dealer has if it stops the feed to sniff or manipulate it before passing it through to the customer.

In reviewing the fine print of account forms, you notice that even ECNs withhold the right to intervene as market makers. Yes, it is confusing! In FOREX, ultimately, "You pay your money and you take your pick."

How to Classify a True ECN Broker

Forex is a very lucrative market and it is attracting people everyday who are eager to invest their hard earned money and make it big in short span of time.  

Due to it's high interest among public, new Forex brokers are appearing in the market continuously. 

There are countless number of Forex brokers in the trading world so choosing the right one is absolutely crucial to start your trading journey.

In my previous article, I have already stated the basic steps to choose a broker that would keep your trading safari less dreadful and help you achieve your goals without worrying about external factors. After getting useful comments from knowledgeable community members and gaining experience through research and trying out multiple brokers, I am confident that ECN brokers are way more suitable than Market Markers.

What is an ECN Broker ?

The word ECN is an abbreviation for Electronic Communications Network.

It provides a marketplace where people or organizations from different parts of the world gather to compete bid and offer against each other thus providing small spreads for traders.

It is always advisable to pick an ECN broker due to the fact that they will never trade against you like Market Makers.

Their main source of income is through "commission" so they absolutely don't care if your trades win or lose.

However, there are many brokers who claims to be an ECN broker to grab clients when they are actually not. This is a very serious cause of concern and We traders must initiate proper steps in identifying them.

This would not only help to eradicate scam brokers but will also improve your percentage of return in the long run. 

How to Identify True ECN Brokers ?

I have come across few terms that I would like to share with you all as often new traders get confused by these :-

A) True ECN 
B) ECN by Association 

C) Outright Bucketshop.

These are often used interchangeably by Forex Brokers and traders but if you know the real meaning, your life would become lot easier.

True ECN brokers offers a transparent platform where traders, banks, organizations can compete against each other by sending bids and offers. Traders get the best deal for their orders at that specified time.

ECN by Association acts as a Level 2 brokers that forms a bridge between traders and real marketplace or True ECN brokers. These types of brokers have their own in house platform and can manipulate your trades if they want.

Outright Bucketshop are simply thieves, scams who are out there to steal your money. I have only one word for you if you happen to be with them and that is "good luck" 

MODE OF IDENTIFICATION

- Most traders usually new and gullible ones never read the broker agreement that usually tells you if the broker is a True ECN or ECN by association. All regulated ECN brokers will state that as it is mandatory for them to disclose such information to their clients.

- True ECN brokers will have variable spreads. I'm sorry to tell you if any ECN broker promises to offer fixed spread then it's not a True ECN broker.

- Absolutely NO dealing Dealing Desk if it's an ECN broker. Usually Market Makers have Dealing Desk meaning they will trade against you. Tips : In order to find out if it's a dealing Desk broker open a demo account and a small real account. you will see the pip difference and how much the price varies during news.

- No restriction in setting the distance of Stop Loss or Take Profit. If a broker doesn't allow Scalpers or Day traders take your pick what would that broker be? Yes you're right. That's not an ECN broker.

- Check Forex brokers chart and your order chart. Do you see any difference any BID price? If there is no difference then bingo you're with an ECN broker.

- A True ECN broker always allow traders to place any lot of trades. You can absolutely trust me on this one. Tips : If you really want to find out if it's a True ECN broker, place a trade bigger than 5 standard lots. If the order gets rejected then it's not a True ECN broker.

- Usually True ECN brokers won't promise you big offers and discount while opening an account. Like I said before they would generate revenue through commission regardless of you win or lose your trades.

- True ECN brokers will display all pricing updates every minute as the prices are coming live from the market. Tips : Check the Platform and best would be to compare it with a demo platform as well.

All these tests can be done by anyone to distinguish a True ECN broker from a Fake ECN broker. 

So what does your ECN broker stand for? Electronic Communications Network or Electronic Con for Newbies ? 

If I have missed out on any point, feel free to add them and let me know as well. We can only make our trading journey beautiful by helping each other.

- If your Broker is giving you only negative slippages then it's not a True ECN broker. Slippage is an usual occurrence and that's pretty normal in a True ECN market. Slippage can be both positive as well as negative.

Cheers !