In the brokerage industry, there are two business models. Every trader needs a middleman that connects them to the largest financial market in the world. Some of these firms are classified as electronic communication networks. They have a few advantages over rivals. Here is why.
If you are only starting your Forex career, it is vital to understand the distinction between market makers and ECNs. It determines the way your costs are structured and prices are formed. In Vietnam, traders have access to both models.
Basic Distinctions
So, why is an ECN account better? Different brokers show clients different pricing based on their model. It is crucial to know what the other type is like to understand the benefits.
Market makers, as the term suggests, define their prices for buyers and sellers. The gap between them — the spread — is their revenue. Moreover, these companies act as providers of liquidity for clients. Every time you win, the profit is paid from the company’s accounts. It is not difficult to see how this may cause manipulation.
All trades are held within the broker’s system, and orders are filled at their discretion. That is why such intermediaries are known as brokers with a dealing desk. An ECN is a broker whose clients trade based on live market quotes and pay a commission per trade.
ECNs broadcast live market quotes. All the prices you see on the trading terminal are actually being used in the market. The company’s revenue is the commission charged per trade.
Why ECN Accounts Are Superior
Neither of the types is superior by definition. Still, the very model of market maker brokerage pits the interests of these companies against the interests of their clients. They may be tempted to change their spreads. Of course, fierce competition in the industry does not allow providers to deviate too far from live pricing.
The second model is more transparent. You know exactly how much every trade costs. Streaming market prices may not be manipulated. To sum up, the main benefits are as follows:
- better transparency of all operations,
- access to real-time quotes,
- impartiality of the broker,
- tight floating spreads,
- both positive and negative slippage.
Slippage is what happens when your order is executed at a price which differs from the one you envisioned. This is particularly common in highly volatile markets. In the case of ECNs, this phenomenon may work in your favour.
Is There a Catch?
If you compare honest market makers and ECNs, the key difference is the costs. Many brokers now offer tight spreads, as it is an essential competitive advantage. Not everyone is happy with the need to pay a commission. Naturally, costs depend on the frequency and volume of your trades. However, ECNs provide the most transparency, which may be worth paying for.
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