What is a Forex Market Maker?
A Market Makers is a broker which takes the other side of a client's trades and there seen as crooks by many traders because of course, if the client losses. Many traders therefore think this must be bad but actually its not and traders who place orders through a market maker very often get a better service than with other types of brokers. Before looking at why, lets take a look at how market makers work and make money.
Some Market Makers will just take a client's trade and then offset it with the trade of another client who wants to do the opposite which means the broker profits from the spread or will edge positions which cannot be offset but a market maker can also trade against some or all of their clients on there books so they win when their clients losses which appears a huge conflict of interest and there is but as we have said elsewhere on this site – the broker doesn't have to help the client lose, he will do that anyway!
Lets be frank 95% of all traders who open an account lose. Most market makers know this and simply let it happen – they DON'T in most cases care about helping as the statistics are in their favour. As they take so much money onto their book, they have a lot of profit and can offer very tight pip spreads because these are not a major portion of their total revenue – client losses are.
Providing the market maker is regulated, they very often offer the best service ( but you should test them via a demo account which should be an exact mirror of actual trading account) and see how you get on. Most clients hate the idea of a market maker but you can actually get better and tighter pip spreads and its up to YOU to beat the odds. Most traders who lose money in their trading accounts like to blame others and a market maker is an easy target but they should really be looking at their trading strategy.
What is an STP Broker?
STP brokers are really middlemen and are sometimes referred to as Introducing Brokers or IB's they send all orders from their clients directly to one of their brokers (the majority of whom are market makers).
These brokers make a profit from the difference in the spreads that they charge their clients and the spread that they get quoted from the broker they have given the trade to execute in the market. An STP broker's spread can be competitive because they normally have multiple brokers, they hand trades to so can pick the broker offering the best spread.
On of the advantages that many quote about STP brokers is because never bet against their clients and they make money from spreads it's in the STP broker's interest for the client to succeed and keep giving them commission via spreads on currency pairs. The idea of a broker helping clients in anyway whatever is rubbish – if brokers made money trading, they wouldn't need clients and if a client seeks a brokers advice – they shouldn't be trading the markets at all.
I think an STP broker should be judged on their dealing spreads and nothing else and they are not better than market makers as a whole in terms of spreads or service. You should simply judge on the usual criteria for choosing a broker which are – are they regulated, the reliability of the trading platform, the spread, security of funds and regulation.
What is an ECN Broker?
An ECN broker can still pass their trades directly to another bank or broker but unlike an STP broker an ECN broker provides access to real time Depth of Market (DOM) information to clients via its trading platform. The information in the DOM window shows all orders on the broker's books allowing their clients to pick who they wish to trade against.
An ECN broker allows all types of traders from small retail traders, to large banks to trade against each other on a level playing field. ECN brokers therefore never profit from their client's loses, they simply provide a market place for traders to trade against each other. ECN brokers are a good option for many traders because they offer tight spreads due to the number of institutions who offer liquidity through their book so traders can trade at the best price on the particular pair they are looking to execute a trading signal in.
An ECN broker is the preferred choice for many traders due to the competitive nature of prices offered by a variety of liquidity providers.
In Conclusion Which is the Best Type of Broker?
So which type of broker is best out of the 3 choices we have looked at above? We tend to favor ECN brokers but you can still get a great service from STP brokers and market makers very often offer a great service - don't believe what whinging lossing Forex traders tell you - market makers can very often offer the best rates and service, if there regulated, there is no disadvantage to dealing with one.
Just check a broker ( it doesn't matter what type it is) via a demo account and decide which you like the best in terms of pip spreads, trading platform and service and don't worry about the type of broker they are.