Over the past 4 years I’ve traded foreign exchange with many companies both in Australia and abroad, during this time I’ve experienced the best and worst of the forex markets and also the best and worst of forex brokers in general. I have dealt with market makers, fixed spread providers and on electronic communication networks (ECN’s). Time and again I get asked which type of forex broker model is best.
To answer this question and share my experiences I decided to write this short article on each type of forex broker model.
Fixed Spread Brokers
There are quite a variety fixed spread forex providers in Australia, a few have spreads as little as two pips on the EUR/USD. Trading on a fixed spread can have its advantages and also disadvantages. One of the principle advantages of buying and selling on a fixed spread is that investors are guaranteed consistent spreads during times of market volatility such as interest rate announcements. Volatile times are often the periods throughout which spreads can widen allot without warning time and again catching amateur investors off guard.
Regardless of having the benefit of a set spread during market instability, fixed spread providers will frequently quote wider spreads during quiet periods, frequently their spreads are substantially wider than those obtainable by market markers or ECN foreign exchange providers.
Trading on a fixed spread is often good for amateur traders who are not yet familiar with the wild price volatility of the forex market.
There are several market markers that have given the rest a terrible name by trading in opposition to their customers and cashing in on client losses, however this isn’t everyday practice for all market makers only a select few. Generally market makers are able to offer relatively tight spreads across all the major foreign exchange pairs, however you should know that this not always true if you are looking to buy and sell sizeable quantities or buy and sell around announcements like 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 instability, they regularly do this to guard themselves from scalpers trying to exploit their tight spreads.
When deciding on a forex broker who is a market maker you will need to make certain that you do your homework and make certain that they are not one of the the minority that are actually buying and selling in opposition to you and profiting from your losses.
By far the most transparent foreign exchange broker model is an electronic communications network or ECN. An ECN broker merely aggregates the very best price feeds from many different investment banks and always displays the best bid or offer. A large amount of ECN brokers will charge a brokerage as opposed to applying a spread to the normal market price this ensures that you’ll be trading on the genuine market price as set by the world’s major investment banks.
There’s a lot of advantages of forex trading with an ECN provider probably the most obvious being the spreads obtainable; frequently there is no spread or an inverted spread, these are prices not attainable from market markers or fixed spread brokers.
During volatile times an ECN forex broker will always show the best price obtainable, as ECN providers depend on a variety of investment banks who’re actively buying and selling over these times you’ll at all times get the best price and not be subject to tremendously wide spreads which you’d otherwise get with a market maker.
Naturally it is up to you to decide on type of forex provider that fits you best as each have their very own unique advantages. You should make your decision based on the trading approach that you use and your amount of skill of the market. My personal preference is to trade with an ECN forex broker like IC Markets as I can always be confident to receive the best pricing accessible.