The CEO of Forex.ee, Vlad Karpejev, talks about the ECN and MM brokerage models.
Today, I would like to inform you about the specific aspects of the ECN brokerage model and how it differs from the operating principles of Market Maker.
What is the difference between ECN Broker and Market Maker, anyway?
In today's competitive market environment, there are different aspects of the brokerage business that traders should know well. Obviously, by choosing a broker, you would be evaluating the reliability and reputation of the company and reviewing service reviews of existing customers. Each client has its own business approach, so the specifications of the accounts offered by brokers will play a crucial role in the selection process. Brokers strive to attract a growing number of customers in several ways; However, speaking of accounts, it is obvious that operators are only interested in the most beneficial commercial conditions that promise to be profitable along with the strategy they intend to use. However, there is a catch related to the risks.
When it comes to choosing a broker with which to operate, it is important to understand which business model the company adheres to, as there are fundamental differences that could greatly affect the performance of the operations.
What kind of brokers can you choose and what are the risks?
In the market, there are two main types of intermediation operations models: the ECN brokers and the market makers.
ECN The brokers (of the electronic communication network) link the participants of the Forex market (for example, banks, investment funds, retail traders, etc.) through aggregators, bridges, etc. Once an order is placed, the system seeks the best counterpart with the best available option. Price to complete your order. This means that you act as a creator of liquidity and a taker at the same time, without intermediaries or intermediaries involved in the execution process, which gives all market participants equal rights. Trading with an ECN broker means that you see the real market prices and can execute your orders at that price.
Market makerOn the other hand, it does not process orders to the market, but instead routes them through its own trading desk, acting as the sole provider of liquidity for the client. Because of this, they "make the market" for the merchants: they buy when the merchants want to sell and sell when the merchants want to buy, which means that they take the opposite side of the trade. However, market makers are not interested in customers' profitable operations simply because they take the other side of their operations, so the conflict of interest occurs. In addition, market makers usually have fixed spreads with surcharge included.
Let's look at the table below.
From this table, we can clearly see the significant differences between the ECN and MM brokerage models. But how do they affect your trade on a daily basis?
First, trading with Market maker involves conflict of interest, which means that the broker only wins if you lose. This minimizes the chances of you getting constant profits, since the broker is likely to provide you with new quotes, intervene in your trades and restrict your stock in various ways as soon as you start showing results that are consistently profitable.
In contrast, the ECN broker only benefits from the commissions charged, so there is no conflict of interest, which means that the company is interested in its successful and continuous operations. Among the advantages of using true ECN technology, we can mention the absence of trade restrictions, the inability of the agent to manipulate the price, the 0 pip differentials and the absence of requotes.
Since most traders lose their money with MM brokers, such companies offer terms of cooperation that may seem beneficial at first, but generate much frustration in later stages. For example, MMs may offer bonuses as a percentage of the size of their deposit or use phrases such as "Instant Execution," when in reality it means higher risks and no market access.
How do I check if my broker is True ECN?
Since the use of ECN involves market execution, it should be able to affect the current market price.
To verify if your orders are processed in the market, you must do the following:
- Open a new limit order within the margin with open OCTL2 (your selected price should be between the bid and ask prices);
- Look at the tick table to see how your placed order immediately affects the spread;
- Find the price of your order so that it appears immediately in the OCTL2 liquidity fund.
Keep in mind that if the execution of your limit order was subject to a slip, you can only give it a better price than the one requested when using ECN.
Forex.ee is an established European broker with more than 10 years of experience in the industry that offers only professional trading conditions and authentic ECN technology. The company attracts customers with tight competitive differentials and a reduced commission, while offering an individual approach service. The commercial conditions similar to those of the exchanges in our ECN accounts accurately reflect the needs and preferences of today's operators: high execution speed, low commercial costs and confidence in the security of the funds. Our extensive list of liquidity providers combined with refined technology guarantees the precise execution of orders in any market condition. In addition to the convenience of the client's personal area, each operator is assigned a Personal Support Manager to guarantee the quality of the service.
Waiting for future cooperation,
Your main provider of ECN – Forex.ee.