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Lesson 15: Forex Brokers: Market Makers vs Non-Market Makers
What you need to know about the brokers? Let's get you familiar with the two main types: Market Makers (MM) and Non-Market Makers, which include ECN, STP, and a few others. Grab a cup of coffee, and let's get started!
1. Market Makers (MM)
Who Are They? Market Makers are like dealers. They set both the buying and selling prices. Think of them as your one-stop shop for trading currencies.
How Do They Make Money? They usually make money through spreads - the difference between the buying and selling price.
Fixed Spread: MMs often offer a fixed spread. This means the difference between the buy and sell price remains constant, regardless of market conditions.
What About Scalpers? Scalpers, who make quick trades, aren't usually the favorite clients of MMs. Why? Because they're in and out so fast, it's hard for the broker to make money off the spread.
2. Non-Market Makers
Now, these guys don't take positions in the market. They're more like middlemen. Let's look at the different flavors:
a. ECN (Electronic Communications Network)
How They Work: ECNs connect you directly to the currency markets. They usually charge a commission or sometimes a spread.
Straight Through Processing (STP): Many ECNs use this, meaning they send your trades directly to market makers.
Liquidity Providers: The more liquidity providers an ECN has, the better for you, as it means more price options.
Anonymity: You won't know who's on the other side of your trade, could be a big bank or your neighbor!
b. STP (Straight Through Processing) Brokers
Direct Market Access (DMA): These guys offer direct access to the liquidity providers, like big banks.
Speed: They claim faster execution since they have direct connections, but there’s still some processing time.
Micro Lot Sizing: Unlike many ECNs, STP brokers can offer smaller trade sizes, great for beginners.
c. NDD (Non-Dealing Desk)
Best Price Model: They pick the best prices from a pool of dealers and add their markup.
Anonymity Plus: You trade without the liquidity provider knowing your full trading strategy.
d. Hybrid Brokers
Mix of STP/ECN and Market Maker: They cater to all, from the small trader to the big players.
Flexibility: Good for micro trades but watch out, as they might trade against you if your trades become significant.
Key Takeaways
Market Makers are like all-in-one shops but with fixed spreads.
ECNs and STPs are great for direct access to the market, with ECNs being more anonymous.
NDDs offer a blend of anonymity and best price selection.
Hybrids mix different models, offering flexibility but with a watchful eye needed.
Remember, each type has its pros and cons. Your choice depends on your trading style, the size of your trades, and how much you value things like anonymity or direct market access.
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