The foreign exchange market is a highly competitive industry with hundreds of brokers all vying for a slice of the same pie, but are all brokers created equal? Far from it. In this article we will discuss the various execution models forex brokers use, the ins and outs of each model and why it’s important to trade with a true ECN broker like Vantage FX.
Market makers are the most common type of forex broker. Market makers tend to target retail clients exclusively and keep the risk “in-house”, that is, they take the other side of your trade. When you trade with a market maker, you aren’t trading against other traders and institutional participants, you are trading against your broker. This creates a glaring conflict of interest where the broker loses money when you win a trade and makes money when you lose a trade.
Making money of their losing clients isn’t quite enough for a market maker though, they also charge massive markups on spreads for all their clients. This means they can pay their profitable traders out of spread markup revenue, whilst banking the profits they earn from losing traders. Spreads at market makers are often 10x greater than actual spreads in the underlying forex market. Even though market makers don’t charge commissions, the spread markup alone makes these sorts of brokers the most expensive option.
Market Makers pass all trades through a dealing desk and will re-quote and reject orders they don’t want to take. There are also stories of market makers banning profitable traders entirely and employing a variety of other unscrupulous tactics to maintain their edge over their clients.
STP stands for Straight Through Processing and means the broker doesn’t take the other side of your trades: your trades are passed “straight through” to the real forex market. When you trade with an STP broker, you are trading against other participants in the market so there is no conflict of interest between you and your broker. STP brokers also mark up their spreads, but generally by a much smaller margin than your average market maker. STP accounts are usually commission free as well, so that is attractive for clients who are averse to paying fixed commissions.
STP is a very good model all in all. This model is substantially cheaper for traders when compared to the market maker model and there is no client/broker conflict of interest. Most ECN brokers also offer STP accounts for new traders and traders who don’t like paying commissions.
True ECN brokers
True ECN brokers are the cream of the crop and the only choice for professional and automated traders. ECN stands for Electronic Communication Network and the model was first developed in the equity markets, but has made it’s way to the forex markets over the past few years. The true ECN model is very similar to the STP model, in that the broker doesn’t take the other side of your trades, but places them in the real forex market. Just like with the STP model, there is no conflict of interest when you trade with a true ECN forex broker.
So what’s the difference then? Price. ECN brokers don’t mark up their spreads at all. When you trade with a true ECN broker, you are getting the best possible price available in the market at that time. Spreads on liquid currency pairs at a true ECN broker in the London and New York sessions are often as low as zero points.
Because ECN brokers don’t mark up their spreads, this means they have to charge a small commission fee in order to turn a profit. Even so, once you add up spreads and commissions, ECN accounts nearly always come out slightly cheaper than STP accounts and they truly wipe the floor with an account at your run of the mill market maker. This is why ECN is the choice for professional and automated traders, because when you are trading size or running automated systems, every point matters.
Australian regulated, true ECN forex trading
Want to experience trading on a true ECN account for yourself? Vantage FX is an Australian regulated, true ECN forex broker. Our RAW ECN account offers institutional grade pricing and the lowest commission charge in Australia. Because we are a true ECN forex broker, our clients are free to trade any strategy – scalp, run bots or trade forex signals without fear of broker intervention. We also have a versatile range of forex signal solutions available to live account holders and an attractive 8.88% interest program for active traders.
Come over to Vantage FX today and take one of our RAW ECN accounts for a spin to see what all the fuss is about – you won’t regret it!