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Forex ECN Trading Model vs Fixed Spread Forex Broker Trading

So what are the critical differences between an ECN/STP broker and dealing desk brokers, who are often referred to as "market makers"? We have compiled a simple table of pros and cons, in order to outline the key points of difference between ECN/STP brokers and dealing desk/market making brokers, but we thought we would also go that extra mile in order to explain the difference in more detail.


Feature ECN Trading Model Fixed Spread Broker Platform Explanation
Anonymity

On dealer forex trading platforms, the dealer knows your open positions, trading style and tactics and can use this information to his advantage.

Client-To-Liquidity
Trading

On the FXCC ECN, you can trade instantly on prices streamed by leading Financial Institutions.

Re-quotes

Re-quotes are common in traditional spread trading. FXCC does not re-quote. The platform’s technology and strict price/time dealing protocol are designed to fill your trade at the current market price.

Conflict Of Interest

FXCC doesn’t take positions against its clients at all.

Trading During Economic Releases

FXCC allows all clients regardless of forex trade size to trade and put in new orders during key economic releases. During these releases, and at times of unusual market volatility, bid/offer spreads are wider than those available during ‘normal’ market conditions.


Whatever type of trader you consider yourself to be: part time, full time, or hobbyist and whatever  your level of experience there is one constant that applies to trading, that is as relevant to new traders as it is to the highly experienced; a professional attitude towards trading always wins through. Traders should always, irrespective of their trading experience, approach the discipline of trading with the utmost diligence and professionalism.   

The type of broker you choose is a critical decision, which will have a profound impact on your potential success. Should you choose a dealing desk broker, or a no dealing desk broker? It is a straightforward choice and question, and one we will answer immediately. Serious, committed traders, who have developed a professional outlook and approach, should only choose the ECN/STP trading model every time and we will outline some of the reasons why.

Firstly, the majority of FX traders are day traders or scalpers - whose trades can last from seconds, minutes, or hours these FX traders rarely hold FX trades overnight. Therefore it should be a simple decision to decide whether you would rather have tighter spreads, but pay a commission per trade with an ECN/STP broker, versus wider spreads and (theoretically) pay no commissions.

Dealing desk traders "make the market", their own market. They are at liberty to quote their own synthetic price (depending on a list of their variable conditions) which could include how thin their liquidity is, based on the volume of business they are conducting on behalf of their customers. Therefore their quotes are artificial quotes.

Dealing desk spreads are often fixed, which can appear attractive if they are quoting a fixed spread of, for example, one pip on EUR/USD. However, traders may experience slippage and poor fills, meaning that the reality is they are being filled so far from the true market price that the spread is closer to two, or three pips per transaction. The dealing desk broker can also delay filling the order in an attempt to get the best price for the broker.

However, by far the biggest difference between dealing desk brokers and ECN/STP brokers is the fact the dealing desk brokers in effect bet against their customers. If the dealing desk client wins then the broker loses, they are effectively betting against the client. Now whilst an argument could be put forward that with huge volumes the dealing desk broker is neutral in terms of the outcome, the fact remains that a dealing desk broker is taking a position looking to profit if the client loses.

With an ECN/STP model the spreads are variable, depending on the true market conditions at any given time and the quotes provided by the liquidity providers; consisting of major banks and institutions who contribute to the electronic configured network. Traders pay a small transaction fee per trade and there is generally no commissions charged. With the ECN/STP broker they become a bridge, a conduit between the trader and the market. The trader gets straight through to the market via the electronic configured market place with no barrier, no interference and no intervention. The prices come from the network, a liquidity pool created by the contributors.

With the ECN/STP model there is never any re-quotes, all orders are filled at the best possible price at any given time. Occasionally these quotes can be incredibly good value, as low as a small percentage of a pip, perhaps 0.1 depending on the volume of activity within the ECN and that brings us to another key benefit of trading via an ECN/STP broker; the depth of market.

With an ECN/STP broker you will get to see the depth of market and liquidity information. This can be crucial to your timing, particularly if you are a manual trader, who will weigh up the trading opportunity versus the level of activity in the market, before placing the trade.

RISK WARNING: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products, is highly speculative and involves substantial risk of loss. It is possible to lose all the initial capital invested. Therefore, Forex and CFDs may not be suitable for all investors. Only invest with money you can afford to lose. So please ensure that you fully understand the risks involved. Seek independent advice if necessary.

RISK WARNING: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products, is highly speculative and involves substantial risk of loss. It is possible to lose all the initial capital invested. Therefore, Forex and CFDs may not be suitable for all investors. Only invest with money you can afford to lose. So please ensure that you fully understand the risks involved. Seek independent advice if necessary.

FXCC does not provide services for United States residents and/or citizens.

FX Central Clearing Ltd is regulated by the Cyprus Securities and Exchange Commission (CySEC), under CIF Licence Number 121/10. FX Central Clearing is on the FSA(UK) Register (Reference Number 549790) and EEA Authorised.

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