ECN or Market Maker Broker?

 

When deciding which broker to go with there are a whole list of points that you need to consider. For example, is the broker regulated, is the platform user friendly and stable, do they offer the markets I am interested in? The list goes on.

On that list, pretty close to the top often comes the question whether the broker is an ECN broker or a market maker. Generally speaking market makers get bad press when compared to their ECN counter parts; however, the reality is both types of brokers have their pros and their cons. You need to understand both in order to be able to decide which is best for you.

ECN Brokers

ECN stands for Electronic Communications Network. This is basically a network of institutions which provide liquidity in the interbank market. Think of the ECN as a bridge linking the smaller participants in the market with liquidity providers. What this means is that when you put an order through an ECN broker, your order is executed by being matched with one of the liquidity providers. As these liquidity providers, compete for orders, they are often extremely competitive meaning tighter spreads and best possible fills.

Market Maker Broker

These brokers will have a dealing desk. The “desk” will make the market by quoting client a bid and ask price. The desk will initially attempt to match the clients off against each other. This is not always possible. In the cases where is not possible the broker itself will take the other side of the trade and then attempt to hedge the risk with an external liquidity provider. Sometimes the market maker takes the decision to not hedge all the risk – in this case they themselves take the other side of the client’s trade. This receives a LOT of bad press – it is basically understood that the market marker is trading against you and therefore is not on your side.

Now that you understand the basis of each model, let’s look at the advantages and disadvantages of each.

Advantages ECN

  •         Deep interbank liquidity
  •         Tight spreads
  •         No conflict of interest
  •         Easy to fill large orders

Disadvantages of ECN

  •         Commission charges
  •         Generally higher capital requirement
  •         Spreads vary
  •         Better informed counter party.

Advantages of Market Maker

  •         Fixed spreads (not always)
  •         Guaranteed stops
  •         Small capital requirement
  •         Lot sized tend to vary.

Disadvantages  of Market Maker

  •         Huge potential for conflict of interest
  •         Re quotes
  •         Lacks transparency
  •         Sometimes shallow volumes

So, by now we understand the differences between a market maker broker and an ECN broker and we can identify the main pros and cons. Whilst some like the services offered by market maker brokers, more advanced traders will generally prefer the pricing and speed of execution of an ECN broker.

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