The Forex market is unique because there is a huge trading volume at any given time which allows for great liquidity. It also operates 24 hours for 5 days a week and is globally dispersed with no central exchange such as the New York Stock Exchange. Unlike trading in stocks, Forex trading transactions are OTC in nature and largely electronic, allowing brokers and traders to make a deal directly with each other.
Forex is like the stocks market in that any person who wants to trade in them has to set up a trading account first. Retail traders and investors gain entry into Forex primarily through two types of brokers, namely, market makers or STP companies and electronic communications networks or ECNs. Both kinds have their own pros and cons, and these are described in the succeeding paragraphs. Market makers
This type of broker has also two different sub-types and these are retail and institutional market makers. Retail market makers are companies that offer retail Forex trading to individual traders. Institutional market makers on the other hand are mostly big financial and banking establishments which handle trading accounts of banks, corporations, and those with higher trading capital.
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory. The difference between the prices quoted for an immediate sale and an immediate purchase is referred to as a bid-offer spread. A market maker's spread represents his profit on each transaction.
What makes working with a market maker appealing is that prices that they offer are relatively less volatile compared to ECN brokers. On the downside, they tend to have bid/offer quotes that are not as good as those offered by ECN brokers. Also, the occurrence of slippage especially during news releases is much more common with a market maker account. Electronic Communications Network or ECN brokers
ECNs derive prices from multiple market participants from banks to individual traders in order to display the best bid and ask prices on their platforms.\ ECNs obtain prices from several sources which include big financial and banking establishments and retail traders and the best ones shown on their respective platforms. Having said such, as a trader you can usually get better quotes from an ECN than a market maker. Also, ECN brokers do not profit from the spread, rather, they earn it from a fixed commission which has been pre-determined prior to the trade. The main disadvantages of ECNs is that it has higher variability in ask/bid prices which makes calculating for stop-loss limits difficult sometimes and that you have to pay commissions per trade.
Forex is like the stocks market in that any person who wants to trade in them has to set up a trading account first. Retail traders and investors gain entry into Forex primarily through two types of brokers, namely, market makers or STP companies and electronic communications networks or ECNs. Both kinds have their own pros and cons, and these are described in the succeeding paragraphs. Market makers
This type of broker has also two different sub-types and these are retail and institutional market makers. Retail market makers are companies that offer retail Forex trading to individual traders. Institutional market makers on the other hand are mostly big financial and banking establishments which handle trading accounts of banks, corporations, and those with higher trading capital.
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory. The difference between the prices quoted for an immediate sale and an immediate purchase is referred to as a bid-offer spread. A market maker's spread represents his profit on each transaction.
What makes working with a market maker appealing is that prices that they offer are relatively less volatile compared to ECN brokers. On the downside, they tend to have bid/offer quotes that are not as good as those offered by ECN brokers. Also, the occurrence of slippage especially during news releases is much more common with a market maker account. Electronic Communications Network or ECN brokers
ECNs derive prices from multiple market participants from banks to individual traders in order to display the best bid and ask prices on their platforms.\ ECNs obtain prices from several sources which include big financial and banking establishments and retail traders and the best ones shown on their respective platforms. Having said such, as a trader you can usually get better quotes from an ECN than a market maker. Also, ECN brokers do not profit from the spread, rather, they earn it from a fixed commission which has been pre-determined prior to the trade. The main disadvantages of ECNs is that it has higher variability in ask/bid prices which makes calculating for stop-loss limits difficult sometimes and that you have to pay commissions per trade.
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Forex is exciting and fast paced. In order to start trading in Forex, you need to open an account with a broker. Find out about the two major types of currency market brokers and their respective advantages and disadvantages here.
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