There’s a different broker for every type of trader, and the one that suits you may not necessarily suit somebody else. When you’re trading via the internet, you need every last inch of help that you can get, and, because of this, you need to ensure that you’re using a broker that suits you as opposed to one that’s considered to be in vogue. Each trading style suits a different broker, so ensure to do your market research before rushing in. However, once you’ve worked out what type of trader you are, then you’re ready to go. Here, we’ve summarised the different types of broker to help you on your way to finding what’s right for you.
Here, we look at 2 distinct types of broker: market makers and ECNs. Firstly, here’s exactly what a market maker can offer you.
With a market maker, the bid and ask prices that you see displayed publically on the quote screen are internally set, with the broker itself responsible for setting them on their servers.
This means that the price you seen displayed on your screen is available to each and every trader no matter what their stake. In practical terms, this means that whether you’re an individual investor or a large scale financial institution, you’ll get the same price. A market maker will always take the opposite side to your trade so whenever you sell they must buy and whenever you buy they must sell.
Some traders like this system, whereas others are opposed to it on the basis that the rates are set based upon the broker’s own interest. Market makers make their money through the spread that they offer on trades and, although these are generally incredibly reasonable, but some market makers can hold your order and trade against you.
Electronic Communications Networks (ECNs)
On the other hand, ECNs pass on information from a great number of market participants, displaying only the best bid and ask prices on their screens. Broker ECN’s vary a great deal from broker to broker, but it isn’t considered uncommon for there to be no spread at all; especially in some of the more liquid trading areas and in commonly traded currencies.
Seeing as though there is no spread, ECNs make their money by charging a set fee per transaction. Although if you’re a high volume trader this may come at a greater cost, many traders still prefer an ECN to a market maker because an ECN plays no part whatsoever in setting prices, so traders can place their trades safe in the knowledge that there is no scope for market manipulation.
As you’d expect, there are pros and cons to each way of trading, but hopefully this has provided you with the information you need to make a choice about which one may suit you more than the other. In truth, it is wise to try both of them before you buy so consider opening a demo account in both formats and see what works the best for you.