Forex brokers can be divided into two fundamental categories:
- ECN BROKERS
- MARKET MAKERS
ECN (Electronics Communications Network) brokers offer their clients direct access to the vast interbank market, which is participated in by large institutional investors. Working with an ECN broker means observing the order book of an exchange rate and analyzing the various bids and asks. The ECN broker has a simple intermediary function: it takes the client's orders, connects them to the market, and ensures the order is executed for the requested quantity. If there is no counterparty to match the client's order, the orders go on to complete the trading book while waiting to be potentially executed.
The retail client of the ECN broker has the ability to observe the formation of the order book at any time and see the positioning of their orders.
Having access to the interbank market means retail clients can buy and sell at precise prices, without any re-quotes, instantly, and most importantly, benefit from very low or negligible spreads in terms of trading logic. However, the ECN broker requires a commission (fee) for each transaction that varies based on the amount traded. The greatest danger for those working with ECN brokers is "slippage" (price slippage) in conditions of high volatility, typical on days characterized by the release of important macroeconomic data. This means that the trader risks not getting the execution at the requested price and quantity: in case of a stop loss violation without being executed, the risk is to suffer very substantial and initially unforeseen losses. As for the initial deposit required, usually this type of broker requires a higher amount compared to traditional Market Maker brokers, although the amounts required to open an account are becoming lower and lower in order not to lose competitiveness compared to the offer of other brokers.
Market Maker (MM) Brokers, on the other hand, not only act as intermediaries but also have the ability to become the counterparty to orders placed by the client if they deem it advantageous. The Market Maker manages client orders through its own dealing desk, without letting these orders reach the interbank market. It reproduces quotes very similar to those of Forex, but they are not precise to the millimeter. The profit of MMs derives from the spread, not surprisingly before executing a client's order they often wait 10-15 seconds until the price is convenient for them in order to play the role of counterparty in the operation (re-quote). When volatility is very high, a market order risks being executed even tens of pips beyond the price actually requested by the client.
MMs do not require additional trading commissions but offer wider spreads than ECN brokers, especially on minor or exotic currency pairs. On the most important exchange rates, such as EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, EUR/JPY, GBP/JPY, EUR/CHF, EUR/GBP, MM brokers offer a spread between 2 and 4 pips (EUR/USD and USD/JPY, i.e. the most traded exchange rates, almost never have spreads higher than 2 pips). These brokers are very competitive in the market compared to ECNs as they also allow largely under-capitalized traders to access the market: usually even 200 euros is enough to open an account and start trading.
