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Home » Education » Should It Be ECN or a Market-Maker Broker?

Should It Be ECN or a Market-Maker Broker?

Posted by zahirshah in Education - March 11th, 2015 3:04 pm GMT

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One of the main reasons why most (90%) if not all individual retail Forex traders lose money is because they are doomed right from the start. It is no secret that the lot of individual traders who delve on foreign currency trading have very limited capital, but the lure of being able to leverage their small capital and parlay it into a fortune is simply irresistible. Unfortunately, the only affordable option they have to get into the foreign currency market is through the retail forex brokers, all of which are market makers.

ECN brokers are normally shunned by individual investors because of their high minimum deposit requirements ($10,000 minimum) which will expose them to greater account losses, much more than they can handle. It is normally the large institutional investors who course their orders through ECN brokers.

On the other hand, retail forex brokers are able to offer individual investors as low as $50 to open an account. They are more accommodating and are more accommodating with credit. However, if you have not realized it yet, the juicy offers dangled by retail forex brokers to individual investors to lure them into their fold are not without a catch. Once individual investors get into the fold of a retail forex brokers, they (the individual investors) become the milking cow of the brokers.

Here are the reasons why:

  •  As we mentioned earlier, retail forex brokers are also market makers which means they act as a counter party to your trade. This is a clear conflict of interest which interestingly has been allowed by regulators to go on. If you are on a losing trade they remain your counter party and pocket your losses. If you are on a winning trade they widen the spread or they simply pass on your trade to the ECN network for matching.
  •  That’s right; they have access to the ECN network which means they know where the big orders are waiting to be executed including where the big volume trading stops and limit orders are. If you have been in the market long enough, you may have noticed times when prices run up quickly to certain price level before the start of the U.S. Market session (and just short of the price where unknown to most traders large sell orders from bigger players are waiting to be executed). This lures unsuspecting individual investors to buy in thinking the direction is still up triggering the price level where the large sell orders are  trapping the individual investors in the process.
  • They can also run the prices up or down during low volume sessions just to trigger your trading stops and force you to liquidate your positions at a loss. They also have the capacity to move their price quotes several pips away from your profit objective to prevent you from getting out at a profit.
  • They are notorious for slippage particularly during volatile sessions. Leaving you with no option but to accept a raw deal.

It is definitely not a level playing field for retail forex traders. Their best option is to turn to ECN brokers. They may be required to put in a bigger deposit and pay higher commissions but they will get lower spreads and faster execution of their orders at definitely realistic quotes. Best of all, they will have access to order flow data and know where the big orders are lurking. They will have the luxury of trading along with the major players in the industry and increase their chances of profitability.

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