Currency trading in India can be done by using either ECN or Market Maker type forex broker. Before you decide on which of the brokers would work best for you, please read the article to understand the basic difference in them.
ECN Forex Brokers (Electronic Communications Network)
A forex financial expert who uses electronic communications networks (ECNs) to provide its clients direct access to other participants in the currency markets. Because an ECN broker consolidates price quotations from several market participants, it can generally offer its clients tighter bid/ask spreads than would be available to them using Market maker.
ECNs pass on prices from multiple market participants, such as banks and market makers, as well as other traders connected to the ECN, and display the best bid/ask quotes on their trading platforms based on these prices. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs, depending on the pair’s trading activities.
ECN make money by charging customers a fixed commission for each transaction. Authentic ECNs do not play any role in making or setting prices, therefore, the risks of price manipulation are reduced for retail traders. Market maker on the other hand won’t charge you a commission but they make money using the difference in spread.
- You can usually get better bid/ask prices because they are derived from several sources.
- It is possible to trade on prices that have very little or no spread at certain times.
- Genuine ECN brokers will not trade against you, as they will pass on your orders to a bank or another customer on the opposite side of the transaction.
- Prices may be more volatile, which will be better for scalping purposes.
- Since you are able to offer a price between the bid and ask, you can take on the role as a market maker to other traders on the ECN.
- Many of them do not offer integrated charting and news feeds.
- Their trading platforms tend to be less user-friendly.
- Commission plus spread (even though low) is higher than MM
- Leverage provided by them is around 1:50 or 1:100
Two of the main ECN brokers in India are Dukascopy and Interactive brokers.
Market makers “make” or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market. As counterparties to each forex transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.
The exchange rates that market makers set, are based on their own best interests. On paper, the way they generate profits for the company through their market-making activities, is with the spread that is charged to their customers. The spread is the difference between the bid and the ask price, and is often fixed by each market maker. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers. As counterparties, many of them will then try to hedge, or cover, your order by passing it on to someone else.
There are two main types of market makers: retail and institutional. Institutional market makers can be banks or other large corporations that usually offer a bid/ask quote to other banks, institutions, ECNs or even retail market makers. Retail market makers are usually companies dedicated to offering retail forex trading services to individual traders.
- The trading platform usually comes with free charting software and news feeds.
- Some of them have more user-friendly trading platforms.
- Currency price movements can be less volatile, compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.
- Market makers can present a clear conflict of interest in order execution, because they may trade against you.
- They may display worse bid/ask prices than what you could get from another market maker or ECN.
- It is possible for market makers to manipulate currency prices to run their customers’ stops or not let customers’ trades reach profit objectives. Market makers may also move their currency quotes 10 to 15 pips away from other market rates.
- A huge amount of slippage can occur when news is released. Market makers’ quote display and order placing systems may also “freeze” during times of high market volatility.
- Many market makers frown on scalping practices and have a tendency to put scalpers on “manual execution,” which means their orders may not get filled at the prices they want.
The two major market maker which you can use are Oanda and FXCM.
Now that you know the basic difference between the two, make a informed decision in selecting the broker which would be right for you.
You can read more about Forex trading basic in India here.
In case of any specific question about selecting the broker, please contact us.