Comparison of Forex Broker Types: ECN, STP and Market Maker


For this article, I have conducted a research and outlined the Comparison of Forex Broker Types along with their pros and cons. Also, I will provide you with some tips on how to pick the right Forex broker.

AtoZForexThe foreign exchange market is the largest, fastest growing and the most liquid of all the international financial markets.  It is the crossroads for international capital and the intersection, through which global commercial and investment flows have to move. Today, I have compared the three Forex Broker Types: ECN, STP, and Market Maker.

Comparison of Forex Broker Types

Investing in Forex market has great potential rewards, but it also carries large potential risk.  One must be aware of the risks and be willing to accept them in order to trade in the Forex market.  The key here is to keep a golden rule in mind:

“Never trade with money you can’t afford to lose.”

There is a number of examples, where people started trading Forex and got disappointed and frustrated, as they didn’t generate anticipated returns or simply lost their trades. Therefore, my suggestion is to have a proper understanding and knowledge about the types of Forex brokers, before starting the Forex trading career.

The number of online brokers seems to increase daily. They intend to spread their marketing efforts around all the media, including both online and offline, all with one simple objective: To get you to open your account with them. With the advertising, come all the incentives of top up funds to your account once opened, reduced commissions for a limited period, or even a small percentage return of the spread on all your trades. However, one must remember, there is no such thing as a “free lunch.” All these “incentives” are already factored into the commissions or spread.

Major Types of Forex Brokers

The first and foremost step to choosing a broker is to find out what your choices and needs are. Moreover, the choice of your strategy is vital. Generally, there are mainly two types of brokers.

  • Dealing Desk (DD)
  • No Dealing Desk (NDD)

Dealing Desk brokers are known as Market Makers, whereas No Dealing Desk brokers can be further classified into Straight Through Processing (STP) & Electronic Communication Network + Straight Through Processing (ECN + STP).

Comparison of Forex Broker Types

Dealing Desk (Market Makers)

Who are Market Makers and how they work?

A market maker, just as the name implies, “makes” the market. It does so by taking the opposite position to you, often without going to any trading floor or an electronic exchange, i.e., You BUY, They SELL and vice versa. Market makers are creating a virtual market.

Comparison of Forex Broker Types

They are effectively “making a market” using their dealing desk as the primary mechanism.  They make money through spreads and by providing liquidity to the clients. Moreover, market makers have an alarming system in their dealing desk.  Also, they provide both a buy and sell quote, which means that they are filling both the sell and buy orders for their clients.

Pros and cons of a Market Maker

Pros:

  • Free Forex charts, as well as trading news feeds
  • Provides simple forex trading platform
  • Does not charge commission on trades
  • Availability of higher leverages

Cons:

  • Forex rates may be different than that of real-time Forex rates
  • Manipulations may occur in terms of slippage and re-quotes and trigger stop losses
  • Limitations or restrictions on scalping trades and automated trading
  • Generally, spreads may be fixed and can be worse than from an ECN

Who can choose a Market Maker as a broker?

If you want to be a “heavy-hitting” professional trader, then a market maker may not be the best option for you.  If you are a novice or would like to trade smaller lots, then a market maker may be the best type of broker for you.  ECN may be a consideration for the future, but they may not be suitable for everyone’s trading needs or approach.

No Dealing Desk (NDD) brokers

No Dealing Desk (NDD) brokers are basically market providers.  By the very name, they lack a dealing desk.  A market provider is simply a facilitator of your order. It is passing the order through to the interbank (real) market, where other traders take the other side of your trade. They are just a service providers, simply providing service for facilitating.

You are trading through them and not against them. Whereas with market makers you are trading against them, so if you profit, they lose and vice versa. No Dealing Desk (NDD) brokers can either charge a small commission on each trade or just choose to keep a markup by increasing the spread slightly.

No Dealing Desk (NDD) brokers can either be STP or STP+ECN.

What is an STP broker?

In STP (Straight Through Processing) mode, the brokers route their clients’ orders directly to their liquidity providers (banks or larger brokers), who have access to the interbank market.  As the orders do not pass through a dealing desk, they go “straight through” to the interbank market.  Thus the word “straight through” is used more aptly to describe the process, by which orders are handled.  STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.

The changing bid/ask quote is also the reason why most STP brokers have variable spreads.  If their liquidity providers widen the spread, they have no choice but to widen their spreads, too.  Some STP brokers do offer fixed spreads, but most have variable spreads.

Comparison of Forex Broker Types

In STP system, transactions are fully computerized and are immediately processed on the interbank market without the intervention of any broker.

Pros and cons of an STP broker

Pros:

  • Direct access to the interbank market with real time Forex rates
  • Trade using the best bid/ask quotes
  • No conflict of interest in the execution pattern
  • More volatility in quoted price and better for scalping strategies

Cons:

  • Complex trading platform and not designed for retail traders
  • You may probably never know how your orders are managed by the broker

ECN broker and its functionality

The Electronic Communications Network (ECN) is utilized by Forex brokers to provide direct access to its clients and other participants in the Forex market. It is an automatic system that combines the buy and sell order for securities. Participants include banks, hedge funds, retail traders, and even other brokers.  Basically, participants trade against each other by offering their best ask and bid prices.

Comparison of Forex Broker Types

ECN also allows their clients to see the “Depth of Market.”  The depth of Market displays where the sell and buy orders of other market participants are.  Because of the nature of ECN, it is very difficult to put a fixed markup, so ECN brokers usually make their money by charging a commission on the traded volume.

With ECN brokers, all transactions are directly processed on the interbank market in No Dealing Desk (NDD) mode.

Pros and cons of an ECN broker

Pros:

  • The ECN broker will not be trading against you or manipulating the price feed or take out your stops
  • Direct access to the interbank market for real-time Forex trading and automated trading is welcomed
  • Trade using the best bid/ask quotes due to dealing directly with a large number of liquidity providers – no re-quotes or slippage
  • Price volatility may also be enhanced and therefore better for scalping strategies

Cons:

  • Cumbersome trading platform is not designed for retail traders
  • Commission on each trade that may not suit your individual trading strategy
  • Limited trading signals and trading tools, such as news feeds
  • May not offer the higher levels of leverage or provide “free” Forex charts

Who can choose an ECN broker?

For clients with a high volume of trading activity and large account balances, the ECN is obviously the best fit. If you thrive for employing scalping techniques, EA assistants, or automated trading robots, then undoubtedly an ECN environment is best suited for your needs.

Comparison of Forex Broker Types

Concluding, the comparison of Forex Broker Types, I have drafted the table below for a clear overview between ECN, STP and Market Maker. Furthermore, I encourage you to watch this video which takes a look at the risks of insolvency of these three types of brokers.

Dealing Desk (Market Maker)No Dealing Desk (STP+ECN)No Dealing Desk (STP)
Take the opposite side of your tradeA bridge between client and liquidity provider and other participantsSimply a bridge between client and liquidity provider
Artificial quotesPrices come from liquidity providers and other ECN participantsPrices come from liquidity providers
Fixed SpreadsVariable spreads or commission feesMost have variable spreads
Orders are filled by broker on a discretionary basisAutomatic, no re-quotesAutomatic execution, no re-quotes
Displays the Depth of Market (DOM) or liquidity information

Think we missed something? Let us know in the comments section below.

    Share Your Opinion, Write a Comment