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The Pros and Cons of Market Makers, STP and ECN Brokers

The forex market is unlike any other financial entity, as it does not trade through a physical location and provides incredible levels of liquidity and volatility in equal measure.

This also creates challenges, however, in that traders often need assistance to access the marketplace and execute orders efficiently.

There are various different types of brokers to help facilitate this service, namely market makers, STP and ECN brokers. Here are the pros and cons for each:

Market Makers

 In simple terms, market makers are key contributors to rising liquidity levels within the foreign exchange, as they actively set both the bid and ask prices by opposing your trade. As a result of this, a forex broker of this type will typically offer high quality news feeds and free charting software, while the listed currency price movements tend to be less volatile than with other providers.

Conversely, market makers create a clear conflict of interest for clients, as they generate revenue by trading directly against you. This can lead to the cultivation of less favourable bid or ask prices, while there is also clear scope for market makers to manipulate prices in order to achieve their own (and deny their clients’) profit objectives.

ECN Brokers6959432

ECN brokers work within an electronic communication network, whole they are renowned for providing objective and more competitive bid and ask prices. These are derived from multiple sources to guarantee accuracy, and in this respect ECN brokers deliver a far more viable service for novice traders. This also enables you to assume the unofficial role of market maker and derive additional profits, as you are able to offer a price between the bid and the ask.

On the downside, ECN brokers are forced to charge a fixed commission per transaction in order to generate income. Similarly, they can make it difficult to calculate stop-loss and break even points in pips ahead of time, due to the greater spread that often exists between the bid and the ask prices. They may also offer little to more experienced traders, or at least those with a greater appetite for risk.

STP Brokers

STP stands for Straight Through Processing, and this type of broker typically channels the majority of your orders directly through the market. This represents a hybrid model that melds the principles of both market making and ECN brokering, while combining a minimal conflict of interest with accurate prices.

This model can cause ambiguity, however, and this lack of definition makes it hard to determine the quality or relevance of service. STP brokers can also take a while to execute orders, while several re-quotes maybe required to complete your transaction. The lack of speed and efficiency can be damaging to forex brokers, particularly given the real-time nature of the marketplace.

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