One of the most intriguing issues in online Forex trading is what is a market maker, STP and ECN and what are the differences and similarities between them and what the benefits for traders are. First of all you can start by reading a more extensive overview of the aforementioned: Part1 and Part2.
Below is the short summary:
Market Maker (MM), also called a Dealing Desk (DD): MM is an artificial type of broker because it doesn’t reflect the market directly, but simply quotes prices which are similar to what the market displays. Any order you enter is processed internally and never goes out to the market.
Pros: Quick execution (typically no re-quotes)
Cons: Every dollar you gain goes out of the broker’s pocket and every dollar you lose ends up in its pocket = major conflict of interest.
Straight Through Processing (STP): This type of broker typically routes some or all of your orders directly to the market. This is a hybrid model between MM and ECN. Some brokers though say they are STP while they are actually MM, you can never tell and sometimes they do a bit of both – MM for losers and STP for winners.
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Pros: Smaller conflict of interest, more accurate prices
Cons: Slow execution with plenty of re-quotes, if you are a loser your broker might end up moving you to market making servers
Electronic Communications Network(ECN): Is the only type of a broker per-se. Like in equities – brokers are supposed to let you gain access to the market not be the market (like in MM or STP sometimes). So a true ECN broker lets you see the actual prices and display the order in the market. You trade with other traders and financial institutions but not against your broker.
Pros: Direct market, no conflict of interest, typically no spread mark-up
Cons: No guaranteed fills, smallest lot possible is 100k (although I heard FXOpen are working on introducing a solution to smaller players) and there is a commission involved (albeit much lower than the spread you pay to MM and STP).