What an ECN broker is and why it matters for scalping
Updated: Feb 6, 2019
Probably the most important aspect of the forex world is your broker. Here we will look at the difference between the two major types of broker. If you do not have time to read all this article, here is the take home point: Find out if your broker is an “ECN or a STP broker” if it is not, stop using them immediately and switch to an ECN or STP broker.
What are the main difference between STP Brokers, ECN Brokers & Market Makers?
If you trade with a market maker you are not getting direct access to the market. This is the fundamental difference, more specifically market makers trade against you. If you place a trade with a market maker to buy 0.5 lots GBPUSD at for example 1.45 they sell 0.5 lots at 1.45. This is what is meant by trading against you.
In the real forex market, there are no such things as fixed or capped spreads, this can only happen in a created market, which is precisely what market makers offer. They use their own money to make their own market.
One of the main reasons that market makers trade against their clients is they are fully aware of the fact that 90% of traders lose their money within the first 6 months of trading and as such trading against their clients is gives them a high statistical probability of making serious profit.
STP brokers on the other hand allow you to deal with the forex market directly through a small number of their chosen liquidity providers (banks) who they pay a commission to for each order placed. In the case of STP brokers, some of these liquidity providers who provide quotes may also trade the opposite direction to the order placed, but not the broker themselves.
ECN brokers works with hundreds of liquidity providers through the interbank network, all of which are constantly sending quotes. The ECN broker will always show the best offer at the time. Due to the competition there can sometimes be very low to almost zero spreads.