The main market players in forex trading are the largest banks in the world, and they form the exclusive club in which most trading activities take place.This club is known as the interbank market. Retail traders are unable to access the interbank market because they do not have credit connections with these large players. Retail traders are able access the market mainly through two types of brokers: markets makers and electronic communications networks (ECNs).
The forex market is an unregulated global market in which trading does not occur on an exchange and does not have a physical address for doing business. Unlike equities, which are traded through exchanges worldwide, such as the New York Stock Exchange or the London Stock Exchange, foreign exchange transactions take place over-the-counter (OTC) between agreeable buyers and sellers from all over the world. This network of market participants is not centralized, therefore, the exchange rate of any currency pair at any one time can vary from one broker to another.
ECN brokers are those that send your orders directly (apparently) to the international forex market. Their platforms are connected to one or some of the main liquidity providers, banks, and big financial institutions. What these ECN brokers do is to send your order to their liquidity pool and take the best price available. This is supposed to eliminate the potential conflict of interest between the broker and the customer as it may happen with market maker brokers.
Market makers “make” or set both the bid and the ask prices on their systems and publicly display them on their quote screens. They are ready to make transactions at these prices with their customers be they banks or retail forex traders. In doing this, market makers provide some liquidity to the market. As counter parties to each forex transaction in terms of pricing, market makers take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.
Your trading performance can be significantly impacted by the type of broker you choose to place your trades through. If a broker does not execute your trades in a timely fashion and at the price you want, a potential good trading opportunity can be lost. Before deciding on a broker, it is therefore very important to carefully weigh the pros and cons of each broker and choose the one that best suits your personality and trading psychology.
