Electronic Communication Network (ECN) or Market Maker (MM) is the main thing which distinguishes a FOREX dealer from a broker. When you trade the dealer or market maker is the counter party, this is because, for an ECN, a counter order is actually required for execution of the deal. Although the FOREX markets are quite liquid the counter order can become a problem only when the order is very huge, or when the market is extremely slow or fast. The ECN is not able to do quite a few things which the MM does, but actually they do not have to, as they have no balancing of books. But it is also true that trading in ECN will require more accuracy and subtle trading techniques which the trader should aspire for.
If you take into account the various MMs, only a few are good and some are even excellent, but the majority is awful. You should remember the significance of a trade counter party, and should also know that market makers are literally the controllers in the market supposedly to maintain an order in the market. They control the dealing desk, and also No Dealing Desk through liquidity providers, the stream of data, the platform for trading, and tools like pip spreads, re-quoting, rules of trade, cancellation and acceptance of trades and dealer intervention. Fortunately Rule 2-43 of the NFA has reduced a few of these aspects but not eradicated them. There is some progress in this direction but with repeated excess they will be the industry dinosaurs.
On the other hand ECN brokers too have their own problems, the prominent one being their platforms are quite complicated, and learning and using them is very difficult. They mainly consist of raw data and need to be integrated with technical services and charting from a third-party. But the leeway is less as they are basically trade matched orders. In slower or faster markets the liquidity may worsen with a ECN, as market tools which are orderly, are not provided. But my advice would be to look for an ECN once you have gained experience in the FOREX market. You will also find that many retail brokers are providing trading via an ECN for small accounts also. But how they are able to bundle lots of 10k and make them into a 250K lot and escape intervention is not totally understood by me.
The main issue which is predictable is that ECNs will dominate in comparison to MMs because market makers, for maintaining order, often indulge in book manipulation. This manipulations are achieved by activities like dealer intervention, pip spread setting and re-quoting, whenever it please them. The basic problem from this is that market makers actually are trading against their clients. The profit you could make may turn out to be a loss for market makers.
MMs are in the habit of manipulating pip spreads and make it look like a legitimate process for maintaining the market. On the other hand ECNs do not do this generally. ECNs and market makers both will provide DOM (Depth of Market) where you can see the standing orders for buying and selling and also the bid price and the asking price. This is actually quite valuable information when you have practiced the correct way of using it.
Further complications arise when certain companies who are actually MMs advertise themselves as being an ECN broker It is not clear how such a hybrid entity can operate, and in few cases it is just semantics to get off the moniker of being a market maker.
0 comments:
Post a Comment