MARKET MAKER VS ELECTRONIC COMMUNICATION NETWORK

The main market players in forex markets are the largest banks in the world, and they form the exclusive club in which most trading activities take place. This club is known as the interbank market. Retail traders are unable to access the interbank market because they do not have credit connections with these large players. This does not mean that retail traders are barred from trading forex; they are able to do so mainly through two types of brokers: markets makers and electronic communications networks (ECNs).

Market Maker-

Market makers are the one who "make" or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make any transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market.

Any exchange rates display by the market makers are based on their own best interests. The market makers make profit from the spread. Thus, spread is the difference between the bid and the ask price, and is often fixed by each market maker. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers. As counterparties, many of them will then try to hedge, or cover, your order by passing it on to someone else. There may also a times in which market makers decide to hold your order and trade against you. 

Pros:

·         The trading platform usually comes with free charting software and news feeds.

• Some of them have more user-friendly trading platforms.
• Currency price movements can be less volatile, compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.

Cons:

• Market makers can present a clear conflict of interest in order execution, because they may trade against you.
• They may display worse bid/ask prices than what you could get from another market maker or ECN.
• It is possible for market makers to manipulate currency prices to run their customers' stops or not let customers' trades reach profit objectives. Market makers may also move their currency quotes 10 to 15 pips away from other market rates.
• A huge amount of slippage can occur when news is released. Market makers' quote display and order placing systems may also "freeze" during times of high market volatility.
• Many market makers frown on scalping practices and have a tendency to put scalpers on "manual execution," which means their orders may not get filled at the prices they want.

Electronic Communication Network (ECN)-

ECNs are the middle player between Market Maker and the customer. ECNs select and display the best bid/ask price and quotes on their trading platform and this prices are select from various market maker. ECN-type brokers also serve as counterparties to forex transactions, but they operate on a settlement, rather than pricing basis. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs, depending on the pair's trading activities. 

Electronic networks make money from spread and by charging customers a fixed commission for each transaction. Authentic ECNs do not play any role in making or setting prices, therefore, the risks of price manipulation are reduced for retail traders.

Pros:

• You can usually get better bid/ask prices because they are derived from several sources.
• It is possible to trade on prices that have very little or no spread at certain times.
• Genuine ECN brokers will not trade against you, as they will pass on your orders to a bank or another customer on the opposite side of the transaction.
• Prices may be more volatile, which will be better for scalping purposes.
• Since you are able to offer a price between the bids and ask, you can take on the role as a market maker to other traders on the ECN.
• Many of them do offer integrated charting and news feeds.

Cons:

• Their trading platforms tend to be less user-friendly.
• It may be more difficult to calculate stop-loss and breakeven points in pips in advance, because of variable spreads between the bid and the ask prices.

Therefore, it is important that you carefully weigh the pros and cons of each broker before deciding which one to trade through.