➡️ Do you want to know what is the difference between the types of brokers? We know, if you are just starting in the world of trading, it can be very confusing really, they are quite advanced and technical concepts for a person who does not have the proper knowledge.
In this section we will explain in broad strokes the differences between these three types of brokers. ➡️ The ECN broker, Market Maker and STP broker.
➡️ ECN is for Electronic Communications Network (something like Electronic Communications Network), ➡️ Market Makers are the brokers that make / create their own markets and ➡️ STP is for Straight Trough Processing (something like Direct Processing). Now we will explain what these terms really mean.
Let's look at the two graphs above. The first graphic, on the left, and number two, on the right. In both, the same currency, EUR / USD, is represented within one hour. The only difference is that they are from two different brokers. Now, we have broker number 1 on the left and number two on the right. The graphics look the same at the moment, don't they? Well, if we take a closer look, the price on the left chart is 1.35689, while the one on the right is 1.35677.
It doesn't matter which broker we use, the prices charged to buy or sell a currency are the same, right? The answer is yes, it SHOULD be so, but it is unfortunately not. And we will explain why: every time a person buys shares, the share price is the same, it does not matter through which broker you buy it. The reason for this is that the stock market industry is heavily regulated and regulated, prices are obtained from an exchange center, such as the New York Stock Exchange.
In the world of Forex things work differently: prices are not obtained from an exchange center, instead, they are obtained from a market called the Exchange Market (also known as the Interbank Market of prices or Interbank Market) . The Exchange Market is a conglomerate of different banks and investment funds of great importance, which provide currency prices to different brokers around the world.
The prices that the price providers give to the brokers will depend entirely on the relationship between the broker and these entities, so, obviously, the better relationship there is, the better (and cheaper) prices will also exist.
Now, so that we can explain better with this example, let's say that the Exchange Market always has the same entities and let's say that the prices that they provide to brokers around the world are exactly the same. So, let's say (remember it's an assumption) that the Exchange Market is trading at the EUR / USD currency pair at 1.4000 / 1.4001, now this goes for newbies, the difference between the buy price (on the left) and the price sales (on the right) is called SPREAD. Since there is one pip difference between these two prices, we say that this currency pair has SPREAD OF 1 PIP.
Then, the Exchange Market provides and trades the currency pair named above with a spread of 1 pip for all the different brokers around the world. Now, those different brokers are the ECN brokers, the Market Makers and the STPs.
The ECN broker will take this 1 pip spread and add a few more pips to it, obtaining in total a 3 pip spread. Now the price is 1.3999 / 1.4002 and it is different from the "original" price of the Exchange Market. The reason why ECN brokers add 2 pips is to have a higher spread and this is how this type of broker makes a profit, it is fair.
The Market Maker broker will do exactly the same, they will take this 1 pip spread and they will undercut the ECN broker, adding only 1 pip to the original 1 pip spread, with a total value of: 2 pips, we would then be at 1.3999 / 1.4001. The price is different from the original on the Exchange Market and also different from that of the ECN broker. And this is why the prices vary in the charts that we saw previously.
➡️The STP broker: It is a mix of the brokers mentioned above, so they will provide a spread of 2 or 3 pips to their clients, depending on their level of success, so this broker is a mix of the two brokers
Now, ➡️the ECN broker it actually provides market conditions, then, although they are more expensive to operate, the actual market conditions provided by the Exchange Market will be the same market conditions or to operate provided by the ECN broker. And this is fair, since, until now, they provide fair and real market conditions.
Now this is where the game really changes, ➡️ The Market Maker, although they are cheaper, they will not provide real market conditions, in fact, these brokers (not all, but usually those without regulation if they do) will manipulate market conditions in their favor. Here are some of the ways they do this:
- Let's say you have made a trade with a profit target of $ 400, and you trade, your trade goes as expected and you generate these $ 400. The Market Maker broker will also do the same operation in the Exchange Market, and they will also obtain 400 dollars of profit, so when they have to give you your profits they will not have to use their money to pay you. Basically they will take their earnings from the Exchange Market and transfer them to your account, and the money they will earn is probably the commission they have charged you, if they charge commissions at all.
- Another way is by using the so-called Virtual Dealer Plugin: (something like the "virtual broker plugin") is a software unit that allows brokers to trade against you, either automatically or manually. Now, for example, let's say that we are talking about the same operation that we were talking about previously, where, if your operation went as you expected, you would earn 400 dollars.
Every time you trade, you put your broker at risk, so they effectively have an interest in you losing, since the risk can be so great, if you are a very good trader, and the way they try to controlling this risk is working against you. So, for example, you will see a buy operation that rises, rises and continues to rise, but just when it is about to reach your goal, you will see a large decline in the market and it will turn against you, you will be "stopped out" that is to say liquidated. This is great evidence that the Market Maker is using the Virtual Dealer.
- Another example is that you may see a difference between the Demo Account and the Real Account. For example, in your Demo account you are a motherfucking trader, your operations are going super well, everything goes according to your strategies, but you use these same strategies in your Real Account and you notice that you have huge losses, you will see huge movements of market against you with no real economic data to back it up. So this is evidence that the Market Maker broker is against you, either manually or automatically.
➡️ Now, the reason a broker can do this is because lack of regulation ⛔ . The regulations in general are improving every year and are becoming stricter, so in the case of a Market Maker broker, you should investigate further, because it may be a Market Maker broker that operates against you.
We do not want to confuse you, there are many brokers of this type that are great, only that there are some that are not, without regulation, and that can operate against you, so in these cases you must be more cautious.
The STP broker is a mix of the other two types of brokers, but it really depends on what type of trader you are, if you are a bad trader, or not very successful, they will probably create the market for you, and provide it with a spread. low, but they will make you trade in manipulated market conditions, where they will make you believe you are winning and then one day they will trade against you.
If you are a good trader, they will probably give you real market conditions but the spread will be higher, to ensure the highest possible profit, in fact, they may even do the opposite depending on their business model, but whatever the case may be. , STP-type brokers, since they can get the best of the other two types of brokers, have several algorithms or people who manually observe different trading accounts and check what type of trader you are.