Over the years we have dealt with market makers, fixed spread providers and on electronic communication networks (ECN Brokers). We often get asked which type of Forex Broker model is the best. To answer this question and share our experiences we decided to write this short article on each type of Forex Broker model.
Fixed Spread Brokers
There are quite a lof og fixed spread Forex providers. A few have spreads as little as two pips on EUR/USD. Trading on a fixed spread can have its advantages and also disadvantages. One of the main advantages of buying and selling on a fixed spread is that traders are guaranteed consistent spreads during times of market volatility such as interest rate announcements. Volatile times are often the periods in which spreads can enlarge a lot without warning.
Regardless of having the benefit of a set spread during market instability fixed spread providers will frequently offer wider spreads during quiet periods. Often their spreads are essentially wider than those obtainable by market markers or ECN foreign exchange providers.
Trading on a fixed spread is often a good choice for new traders who are not yet familiar with the price volatility of the Forex market.
There are several market markers which have given the rest a terrible name by trading in opposition to their customers and cashing in on client losses. However this is not everyday practice for all market makers. Generally market makers are able to offer relatively tight spreads across all the major foreign exchange pairs. Nevertheless you should know that this not always true if you are looking to buy and sell sizeable quantities or buy and sell around announcements like interest rates or non-farm payroll.
Some market makers are known to widen their spreads by as much as 50 points during times of market instability because they want to protect themselves from scalpers who are trying to exploit their tight spreads.
When you decide to use a Forex broker which is a market maker you should be sure that they are not one of the the minority which are actually buying and selling in opposition to you and profiting from your losses.
By far the most transparent Forex Broker model is an electronic communications network or ECN. An ECN Broker merely aggregates the best price feeds from many different investment banks and always displays the best bid or offer. A large amount of ECN brokers will charge a brokerage as opposed to applying a spread to the normal market price. This guarantees that you will be trading on the authentic market price which is set by the world’s major investment banks.
There are a lot of advantages of trading with an ECN Broker probably the most obvious being the available spreads; often there is no spread or an inverted spread. These are prices not achievable from market markers or fixed spread Brokers. During volatile times an ECN forex broker will always show the best avaiable price as ECN providers depend on a variety of investment banks who are actively buying and selling over these times you will at all times get the best price and not be imperiled by extreme wide spreads which you would otherwise get with a market maker.
It is up to you which Forex Broker fits to you best because each have their own unique advantages. You should make your decision based on the trading approach which you use and your amount of expertise of the market. Our personal preference is to trade with an ECN Broker because you can always be confident to receive the best pricing accessible.