Hi Martinrue.
Hope this helps:
'Since the foreign exchange market is not centralized, exchange rates can vary from one broker to another. Traders are mainly able to enter the foreign exchange market through two types of brokers: market makers (MM) and electronic communications networks (ECNs).
Quote Generation
MM Brokers – Market makers set both the bid and the ask prices on their systems, display them publicly on their quote screens and stand prepared to make transactions at these prices with their customers. Generally these are in line with what most of the broker’s own liquidity providers are offering them but they can deviate from “norm” at times. Also, the quotes are typically smoothed and do not show every tick change in the market.
ECN Brokers – A true forex ECN will pass on prices from multiple market participants, such as banks, market makers and hedge funds and aggregate the best bid/ask quotes on their trading platforms based on these prices. This allows the trader to see the true market. The greater number of liquidity providers, the better the spreads will be for the trader.
Fixed or Variable Spreads
MM Brokers – Many or most market maker brokers offer fixed spreads as a way to price in profits. Some are now adding the availability of variable spreads to appear as though they are passing on interbank market rates to the clientele but they still have their profit built into the spread.
ECN Brokers – Since an ECN aggregates quotes from many liquidity provides their spreads vary depending on the currency pair’s trading activities and market liquidity. During very active trading periods, it is possible not to have a spread at all.
Counterparties
MM Brokers – As counterparties to each forex transaction in terms of pricing, market makers must take the opposite side of the trader’s trade. In other words, whenever the trader sells, they must buy from him/her, and vice versa. A trader is basically trading against the market maker broker unless the broker deems the traders account is too large of a risk for the broker. If this is the case the broker will offset the trader’s position by taking on the same position with their liquidity provider at a better price as a way to price in their profit.
ECN Brokers – When trading with an ECN broker the broker is passing the best bid/ask through to the trader. The counterparty to the transaction is the bank or trader that has submitted the best price to the ECN. The ECN broker does not hold the trader’s position; it only matches the trader’s order with the best price available.
How Brokers Make Money
MM Brokers – The market maker broker will make money in one of two ways. First, it is typical for a market maker broker to take the other side of a new or unprofitable trader’s position. This means when a trader sells, the broker buys from them. In this case, the market maker will profit when the trader loses. Second, if the market maker is hedging the trader’s account because he/she is profitable, they will price in a profit to the spread shown. An example may be a large fund manager that is profitable takes a long position by buying a currency with a stop order. The market maker broker would fill this order when they are able to buy at a lower price. To do this effectively they could hold the price they are showing their clients down a pip or two to lock in their profit. The rates that market makers set are based on the broker’s best interests.
ECN Brokers – Since traders are trading directly with other market participants, the ECN broker charges a fixed commission for each transaction made. Most of the time the effective spread, that is the spread plus commission charged, is still tighter than a market maker broker due to the number of liquidity providers.
Scalping
MM Brokers – Market makers frown on scalping practices and are known to add restrictions that potentially make order executions more difficult. It is possible for market makers to delay transactions or manipulate currency prices to run their customers’ stops or not let customers’ trades reach profit objectives.
ECN Brokers – ECN brokers allow scalping because it is in their best interest and an ECN is typically more volatile, which may be better for scalping. The liquidity providers do not have a vested interest in any particular trade as most times, if not all times a trader will enter a trade with one liquidity provider and later exit the trade with another. An ECN will also provide anonymity for the trader. The bridge between the liquidity providers and the traders will not allow pending orders to be seen by the liquidity providers. The ECN business model is to provide the best pricing available to its clients and charge a commission in return. Scalping strategies typically trade frequently and will potentially generate the broker substantial commission.
Guaranteed Stops
MM Brokers – Many market maker brokers guarantee stop orders during “normal” market conditions. Some are now charging a fee for this benefit. This however “does not apply to major fundamental announcements or volatile market conditions.”
ECN Brokers – With an ECN broker the broker is not taking the other side of the trader’s position. The trader is not trading with just one counterparty but potentially all of the counterparties providing liquidity to the ECN. For this reason it is not possible to guarantee stop orders with a true forex ECN.
Conflict of Interest
MM Brokers – Market maker brokers either take the opposite side of the trader’s position or hedge/offset profitable trader positions. If a trader is consistently profitable the market maker may begin to price in a profit before accepting the trader’s order. If a trader is not profitable, then the market maker will make money when the client loses money. This presents a clear conflict of interest as the market maker broker is not putting the client’s interests first.
ECN Brokers – In trading with a forex ECN broker, the trader’s interests are aligned with the broker’s interests. When the trader makes money, he/she will continue to trade with the broker and in turn the broker will earn money by the commissions charged. It is in the ECN broker’s best interest to have successful and profitable traders.'
