Brokers: Market Maker,STP And ECN
Brokers can make you go broke if you don’t know what you want.
One of the most disturbing questions in Forex trading is what is a Market Maker, STP and ECN?
Keep on reading you will know everything about them.
They are also called a dealing desk(DD).
This is a virtual type of broker because it does not reflect what is happening in the real market.
They set both the bid and ask prices on their system and show them on their quotes screen.
Market Makers trade against clients and make the market.
Any order you enter is processed internally and never goes out to the real market.
The sincere truth about Market Maker is that they are watching your traders.
This is what they do. They divide clients into two groups. Profitable Traders and Losing Traders.
A. Profitable Traders
Brokers automatically take the other side of your trade and hedge the position in the real markets.
For example, if a trader places a sales position the broker buys the position and then hedges the position in the real market.
This is what I am saying: if you sell the broker will buy and then sell the same amount in the real market.
Don’t be surprised, this is done automatically by an algorithm.
So they make money twice:
1 Through Spread and commission
2 Through the position they placed in the real market because you are a profitable trader.
B. Losing Traders
Brokers automatically take the other side of your position since you are a losing trader. Then the broker gains.
So the more they have losings traders the more their profit.
Every dollar you gain goes out of the broker’s pocket and every dollar you lose ends in its pocket.
They make money through spread frequently.
They manipulate the price since traders can’t see the real market quotes.
STP (Straight Through Processing)
They are also called No Dealing Desk (NDD).
They enable trades to be performed electronically without manual intervention.
They provide access to the real market without dealing desks.
All orders are passed to liquidity providers.
Liquidity providers act as supporters for Forex brokers. So both the Liquidity provider and broker need to make money.
Note: Liquidity means enough buyers and sellers performing various activities in the market.
Also Read: Top 10 Best Forex Trading Platforms
So for STP brokers liquidity providers are the counter-party to your trades.
They take the opposite side of your trade and looking to make money by closing the position later in a trade with
So more liquidity providers mean more liquidity and better fills for clients.
STP brokers make money through spread by adding small markups on the bid and ask rates.
Here is the truth:
Sometimes these STP brokers route your order to the market and sometimes act as a market maker.
For example, losing traders will not be routed to the real market so that they can make money from you but profitable
trades are routed to the market directly.
So they make money twice by adding spread to markup bid and ask and also make money from losing traders.
ECN (Electronic Communication Network)
Sometimes they are called Direct Market Access.
This is the only type of broker that allows you to have access to the direct market.
ECN brokers pass your trades to an ECN pool In which other liquidity providers, banks, hedge funds, brokers and
individual traders perform different activities.
So all participants (banks, traders, market makers) trade against each other by sending competing bids and ask price
into the system.
They offer only variable spread.
Since ECN brokers cant manipulate and add markup spread to ask and bid then the only way they make money is
They also display depth of market in the data window. Everyone can see where the liquidity is.
Spreads are tighter here and all trading styles are welcome with this type of broker.
Market Maker or Dealing Desk makes money on spread and from losing traders and if they have a lot of wining
traders they would soon go into bankruptcy
STP send your position directly to liquidity providers .
Thou STP brokers have limited number of liquidity providers so the more they have the more their will be price
competition and this is good for traders.
Brokers make money through increasing spread a little.
ECN is the only broker that allows traders to buy from one another without any market manipulation or spread
So this type of broker makes money from commission.
Not all brokers will be sincere with you.
Some will tell you they are ECN and they not.
Some will tell you they are STP and they are market markers.
The only way to know the truth behind them is to do your research and their reputation will speak.