Imagine you move into a new home and need a couch for the family room. You know that you want a black couch, preferably one that will wrap around the corner. You have money in hand for the investment, but you can't shop until you make a choice: will you work with a local furniture maker able to customize the couch to your needs or visit a few furniture stores offering products from a variety of brands?
In this case, you must decide whether to work directly with the person creating your product or a third-party dealer working as the middleman between you and the creator of the product. You will make your decision on a variety of factors, including the availability of black couches in this style at local furniture stores and your budget.
This decision is similar to one that you have to make when selecting a Forex trading platform. While you are considering a variety of factors from current spreads to the availability of mobile trading, you must also consider who is positioned on the other side of every trade. Will your broker make the deals with you directly or source them from other traders and firms before passing them on to you?
A "market maker" is a broker doing business directly with traders using their own liquidity. In the opening example, the market maker is the furniture craftsman making customized couches and delivering them directly to their customers.
Market makers determine the buy and sell quotes based on their own analysis of the market. Just as you are watching for reports, tracking data and paying close attention to developments in world news that may affect financial markets, this type of broker is performing their own analysis and making predictions in order to guide their trading activity.
The money maker has an interest in every position you take because they receive the opposite position and stand to win or lose money in the end. Here are some things you need to think about when dealing with a market maker:
When you play the market maker's game, you play by their rules. When you see account terms that offer fixed and capped spreads, you are more than likely dealing with a broker that supplies their own liquidity in order to set those rules.
Electronic Communications Network is typically shortened to ECN. This refers to a broker collecting quotes from third-party liquidity sources or other traders and presenting them on one trading platform which they operate. In our opening example, the ECN is the local furniture store offering a variety of products from different manufacturers.
One difference between the furniture store and the ECN broker is that you don't necessarily know who is on the other end of any trade when dealing with the Forex market. You can see the name of the manufacturer on most couches in the store, but your broker will present the best buy and sell quotes without revealing the name of the trader or firm that you are trading against. The broker's job is simply to present quotes that are attractive to traders so that their trading platform thrives with activity.
When you see brokers advertising the most competitive spreads or see a commission assigned to each trade, you know that you are likely dealing with an ECN broker.
Some brokers will offer ECN trading accounts while also working as market makers for other accounts. This means they are setting the buy and sell rates for some deals, but not necessarily all. You need to read the terms closely to determine which type of account you are opening when working with this type of broker. It's important to keep this information in mind regardless of which type of Forex broker you choose.
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