The recent technological growth has enabled small retail investors to trade on financial markets and compete against sizeable financial institutions.
The most liquid and large market, that is one of the most frequented ones as well, is the Forex market, where traders can earn on price fluctuations on currency pairs.
Forex trading takes place on an over-the-counter (OTC) market instead of a regulated exchange like, for example, shares. Nevertheless, to trade on an OTC market, you need a broker.
Choosing the right broker is essential as they impact on trading conditions, accessibility of different exchange rates, speed of transactions or deposit security. Therefore, they contribute heavily to making their customers wealthy Forex traders or the opposite.
Basically, there are two types of brokers that can be chosen: Market Makers or ECN brokers.
Market Makers, like for example UBS or Morgan Stanley, are brokers who simply “make the market” by setting the ask and the bid prices using their own proper systems and displaying them on their platforms enabling investors to open or close trading positions.
Market Makers pay winning customers positions out of their own funds. Unfortunately, it means that when their customer has a winning trading position, they lose. Therefore, success of their customers is not compatible with theirs.
ECN stands for Electronic Communication Network (ECN). ECN brokers, like for example Purple Trading broker, provide their customers with direct access to other investors using interbank trading prices.
ECN brokers provide their customers with prices from different liquidity providers to compete in the same actions. Consequently, their clients are given more beneficial prices and better trading conditions.
What is more, ECN brokers operate in highly transparent and effective environment and they earn money by charging commissions on every trading position (for example Purple Trading presents commissions they touch on their business website). Therefore, unlike Market Makers, they make money when customers have winning positions.
Market Maker vs. ECN broker – which one to choose?
The major difference between Market Makers and ECN brokers is the fact that ECN brokers’ wealth is correlated with customers’ one, contrary to Market Makers.
Consequently, ECN brokers will never bet against their clients as they would harm themselves as well. It makes choosing a reliable ECN broker more secure and safer option than going for a Market Maker.
In order to choose the best ECN broker, you should check out insights given by existing customers to each one, like for example Purple trading reviews or others you can find on rating sites.