Over the last four years I have traded forex with a number of brokers both in Australia and abroad. During this time I have experienced the best and worst of the forex markets and also the best and worst of forex brokers in general. I have traded with market makers, fixed spread providers and on electronic communication networks (ECN’s). Often I get asked which type of forex broker model is best. To answer this question and share my experiences I decided to write this article on each type of forex broker model.
Fixed Spread Providers
There are quite a few fixed spread forex brokers in Australia some have spreads as low as 2 pips on EUR/USD. Trading on a fixed spread can have its advantages as well as disadvantages. One of the main advantages of trading on a fixed spread is that traders are guaranteed consistent spreads during times of market volatility such as interest rate announcements; these are often the periods during which spreads can widen dramatically without warning often catching novice traders off guard.
Despite having the benefit of a fixed spread during market volatility fixed spread providers will often quote wider spreads during quiet periods, often their spreads are much wider than those offered by market markers or ECN forex providers. Trading on a fixed spread is often good for newbie traders who are not yet accustomed to the wild price fluctuations of the forex market.
There are a few market markers that have given the rest a bad name by trading against their clients and profiting from client losses, however this is not common practice for all market makers only a select few. Generally market makers are able to offer relatively tight spreads across all of the major currency pairs, however it is important to understand that this not always the case if you are looking to trade large parcels or trade around announcements such as interest rates or non-farm payroll.
Some market makers are known to widen their spreads by as much as 50 points during times of market volatility, they often do this to protect themselves from scalpers looking to take advantage of their tight spreads. When selecting a forex broker who is a market maker you will need to ensure that you do your homework and make sure that they are not one of the few that are actually trading against you and profiting from your losses.
By far the most transparent forex broker model is an electronic communications network or ECN. An ECN broker simply aggregates the best price feeds from a variety of investment banks and always displays the best bid or offer. Most ECN brokers will charge a commission rather than apply a spread to the natural market price this ensures that you are trading on the real market price as set by the world’s largest investment banks.
There are many advantages of trading with an ECN broker the most apparent being the spreads offered; often there is no spread or an inverted spread, prices not achievable by market markers or fixed spread providers. During volatile times an ECN will always show the best price available, as ECN brokers rely on a number of investment banks who are actively trading over these periods you will always get the best price and not by subject to extremely wide spreads which you would otherwise get with a market maker.
Of course it is up to you type of forex broker you choose as each have their own unique advantages. You should always make your decision based on the trading strategy that you employ and your level of experience in the market. My personal preference is to trade with an ECN forex broker as I can always be assured to receive the best pricing available.