One of the most talked about subjects in the Forex world, is on the subject of choosing Forex brokers; many want to know where they can feel most safe with their money and their trades. The foreign exchange markets are basically unregulated all over the world and so the prices that you get from one broker can vary greatly from the prices that you get from another broker. There are two types of Forex brokers that operate and they are known as: Electronic Communication Network (ECN) brokers and retail market makers.
Market makers set their own prices on their proprietary charting or trading platforms. This set prices based on what they believe is best for them as they are the ones you are trading against, almost like a bookmaker does in sports. Often, they lay off the trades to other traders but what usually occurs is that when you buy they sell and when you sell they buy. This allows for the trader to provide you with a fixed spread since they are the ones setting the bid and ask price. Like sports bookmakers, market makers often find that they have a conflict of interest with their customers and they will often find that they make decisions in their favor and not in the trader’s direction.
ECN brokers however, pass the prices they receive from several different banks and then display the best possible prices to their traders. Often in very liquid and volatile markets you may be able to trade without any spread at all. Of course the question then arises about how they make money. ECN brokers make money by charging you a fixed commission for each trade that you make. But you never have to worry about the conflict of interest that you see with market makers.
Market makers usually offer you proprietary charting software while ECN brokers do not. Trading prices with a market maker is usually smoother making it harder to scalp profits in a very small time frame, while you are able to get much better pricing with no spreads during volatile trading times from ECN houses. A true ECN broker will never trade against you but will pass your order on to another bank or customer. Market makers can stop you out by manipulating prices as well as never allowing your trades to reach their profit targets. Market makers also discourage scalping by never allowing fast trading to be completed at the price that you are seeking.
In conclusion, finding a Forex broker that is a true ECN is very difficult, but it is recommended that you use an ECN broker if possible. However, because of the lack of regulation, it is very difficult to tell if a broker who advertises as an ECN, is telling truth. The minimal regulations that are in place and the industry itself needs to enforce a much better truth in advertising set of regulations. This is happening more and more as trader become more sophisticated. There are hybrid dealers who are part market maker and part ECN, but they are for another day. Do also bear in mind, that there are many highly recommended, credible and legitimate Forex brokers that are in fact retail market makers. If you find a promising broker and as long as they are also regulated by regulatory authorities, you will be fine.