forexvert replies to: Market Makers Vs STP Vs ECN – Newbies should read

Market makers
Market makers in Forex basically bets against you. For example, if you buy 1 lot of EURUSD at 1.35, and your broker is a market maker, they are ‘selling 1 lot of EURUSD at 1.35’, or essentially betting against you. If you win, your broker loses. If you lose, your broker wins.
One sign that your broker is a market maker is from them offering you fixed spreads, or the spreads are ‘capped’ at a certain limit. In a real market, there is absolutely no way an STP or ECN broker can offer you such conditions, unless the broker uses its own money to ‘make the market’ – hence the name market maker.
Given this hard statistic that 90% of traders blow their accounts within the first 6 months of trading, betting against retail traders can be quite profitable business. Also, statistics show that traders with account sizes $10,000 and above are much less likely to blow their accounts.
This is the reason why brokerages that do not bet against their clients prefer to set a minimum account size of $10,000. They prefer to work with consistently profitable clients, who can bring in consistent volumes. An example of such a brokerage would be LMAX, or Alpari PRO (min $25,000).
An example of brokers who are a market makers are Oanda and IG Markets. With that being said, when I was trading with Oanda, I did not receive any requotes, which is typical of a market maker. However, I did get extremely high spreads during news.
Market making can be also used to reduce costs, rather than bet against clients. This is done by internal matching of trades, somewhat like an exchange. If you want to buy 1 lot of EURUSD at 1.35, and another trader wants to sell 1 lot of EURUSD at 1.35, the market maker will internalise the trades and match both parties together, instead of sending both trades to the interbank market, where they have to pay a certain fee for each trade sent.

Straight through processing (STP)
An STP broker simply sends all your trades to the interbank market or its liquidity providers (LPs), regardless of whether they can be matched internally or not. For each trade sent, the STP broker pays a small fee to the LPs. An STP broker has liquidity arrangements with several bank partners, or liquidity providers to provide quotes and agree to take the other side of the trade. This is different from an ECN, as you shall see below. STP brokers usually have high spreads than ECN brokers. Remember, STP is different from ECN!
An example of STP brokers who do not bet against their clients would be FXPig DMA and Global Prime Forex.

Electronic communications network (ECN)
An ECN network has hundreds of liquidity providers all sending quotes to the ECN venue at the same time. The ECN then aggregates all the quotes to show only the best bid and best offer, which make up the spread. This can be zero at times! You can see this is very different from STP brokers, who only stream quotes from several bank partners, compared to an ECN who has hundreds of LPs. It is much more likely that you will see a lower spread on an ECN broker compared to an STP broker.

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