In this Digital era of Forex trading, where currencies are exchanged, brokers serve as essential conduits, linking individual traders to this expansive global market. Among them, ECN, STP, and Market Maker brokers hold significant roles, functioning with distinctive modalities and offering specific benefits to traders including crypto market makers.

Since the differences between these models mean brokers might have substantially different order execution processes or methods, it is required of a forex trader to understand how these models work so that you can know the model to implement for the best trading business execution.

All forex brokers operate under one of these Models, while some brokers make use of a hybrid or combination of two or more of these models. This gives some traders the best view and trading experience if they think the combination of models would work best for their trading strategies. 

However, some forex brokers offer one type of execution for certain accounts and another type for some other accounts. A typical example of this is where a large-volume trader can open up an ECN account, while a mini-lot trader has to go through a dealing desk since a large liquidity provider generally has no interest in transacting small amounts.

What Type Of Broker Are They?

Now, let's take a look at each Forex Broker's Model to know the one that best suits your trading experience and businesses.

Market Maker

A market maker which is sometimes called a Designated Broker, is a broker that plays an important role in how an ETF trades and ensures the continued and efficient exchange between buyers and sellers.

They execute this in various ways, including providing liquidity to the market by selling units to investors who wish to buy, thereby buying units from investors who wish to sell also.

This type of forex Broker model is sometimes referred to as the B-Book forex brokerage model. Note that this model involves taking a market risk since the broker trades against its client. Market Maker has traditionally been one of the popular models for forex brokers due to the high loss rate among retail traders with more of the dealing spread typically captured as profit from client transactions using this Model than in charging a simple commission. 

Market makers sometimes feel the need to widen their dealing spread in times of high market volatility. However, a market maker might elect to requote prices if the market has moved before the client chooses to deal. Quoted dealing prices are typically held for a very short period for a client, which is traditionally known as being “as long as the breath is warm”.

A situation where a market maker might adjust their spread to cause a stop loss order to be executed is known as “Spread Popping”. Market makers operating at large financial institutions can even add enough pressure on the market so that a stop loss order is executed which will be of benefit to them by filling with the transactions that they made at better prices. Also, when orders are placed with market makers by forex traders, the market makers can decide to slow order execution or trade ahead of and around the orders in an attempt to profit further from it.

Here are the pros and cons of Market Maker brokers:

Pros:

• Market Makers can offer tighter spreads during low-volatility periods.
• Market Makers guarantee execution, even during high-volatility periods.
• Market Makers do not slip prices, as they are the counterparty to the trade.
• Market Makers often offer user-friendly platforms and interfaces.
• Market Makers typically offer 24/5 customer support.
• Market Makers do not charge commission fees, instead making money from spreads.
• Market Makers often have a straightforward account opening process.

Cons:

• Market Makers widen spreads during high-volatility periods.
• Market Makers profit from client losses, creating a conflict of interest.
• Market Makers may not provide detailed information about pricing and trading conditions.
• Market Makers may requote prices or reject trades during high volatility.
• Traders have limited control over order execution.
• Market Makers may engage in stop-loss hunting, moving prices to trigger stop-loss orders.
• Market Makers may manipulate prices, especially during low-liquidity periods.

STP Broker

Forex Broker that uses the Straight Through Processing (STP) Model have a fully automated dealing system for their client or customers to use. STP does not operate a Dealing Desk as they are considered NDD or No Dealing Desk.

This type of forex Broker is sometimes referred to as the A-Book brokerage model. 

STP processes trade electronically and inputs the trade directly into a selected group of interbank forex market participants known as liquidity providers for execution at a competitive price. One of the advantages of using an STP broker is that no human-related errors, delays, or costs should be associated with each transaction process. This means that a trader can cut off any intermediary that might introduce or cause unwanted errors, costs, or delays. 

STP brokers allow their customers to execute trades during financial news releases, which is something that cannot be said about dealing-desk market makers. This, in combination with the lightning speed of order execution, gives STP brokers the perfect choice for scalpers and news traders.

Here are the pros and cons of STP (Straight Through Processing) brokers:

Pros:

• They offer competitive spreads due to aggregated liquidity.
• Trades are executed quickly and efficiently.
• STP does not profit from client losses.
• These brokers provide clear pricing and trading conditions.
• They can handle large trading volumes.
• STP brokers can access multiple liquidity providers, improving execution quality.
• They can reduce slippage due to direct market access.

Cons:

• STP brokers often charge commissions or markups.
• Traders have limited control over order execution.
• STP brokers rely on liquidity providers, which can impact execution quality.
• Some STP brokers may offer limited support or resources.
• STP brokers may face risks if liquidity providers fail or experience issues.
• STP brokers may have complex systems, which can lead to technical issues.

ECN Broker

Forex brokers that use an Electronic Communication Network (ECN) Model provide their customers with a means for obtaining direct access to the interbank Forex market for pricing and execution that consists of or requires an ECN Platform.

Using an ECN execution model for client transactions simply implies that a forex broker has No Dealing Desk (NDD) standing as they operate as a liaison between their clients and the greater currency market.

ECN Model broker helps the trader cut out both the market maker and their dealing desk who may wish to profit from their transactions.

In the ECN Model, liquidity on the trading platform is generated by all participants in the trading network. The process of matching orders with each other is known as internalization because it happens within the platform and is not exposed to external execution. But take note that, this is not to be confused with the market maker execution model where the quotations flow is imitated, and the other party to the transaction is the broker. ECN brokers rely on the so-called Electronic Communication Networks (ECN) for their operations. It is a digital system that matches up buy/sell orders for financial products automatically. Forex currency pairs and stocks are the most common products traded via this computerized network.

Here are the pros and cons of ECN (Electronic Communication Network) brokers:

Pros:

• ECN offers the tightest spreads due to direct access to liquidity providers.
• Trades are executed at incredibly fast speeds, often in milliseconds.
• These brokers do not profit from client losses, as they only match orders.
• ECN brokers provide clear and detailed information about pricing and trading conditions.
• They can handle large trading volumes and high-frequency trading.
• ECN brokers offer direct access to the market, allowing for more control.
• These platoforms do not requote prices, as orders are executed at the best available price.

Cons:

• ECN brokers often charge higher commissions or fees.
• ECN brokers may require higher minimum deposits to open an account.
• ECN brokers may have complex systems, which can be challenging for beginners.
• Some ECN brokers may offer limited support or resources.
• ECN brokers may face risks if liquidity providers fail or experience issues.
• ECN brokers may experience slippage during high volatility or illiquidity.
• ECN brokers require traders to have a good understanding of trading and market dynamics.

Kindly keep in mind that these pros and cons may vary depending on the specific ECN/STP and Market Maker broker and their business model. It's necessary to research and evaluate the broker's offerings and reputation before making a decision.

DMA Broker

The DMA (Direct Market Access) broker offers a hybrid model Broker which comprises of both ECN and STP broker elements. This stock hybrid broker executes trade electronically by directly interacting with an Electronic order book, which is a list of orders that buyers and sellers place on the stock exchange. The orders remain in the book until they reach a satisfaction level matching the price that a buyer wants to pay to purchase a security with a price that a seller wants to sell the security bypassing all intermediaries.

DMA traders can view orders directly on the books of the exchange that they are dealing with and are charged on a commission basis instead of through the spread.

Using a DMA broker for stock trading can be a good way for advanced traders to get a more comprehensive view of the market, and see the best possible prices available. DMA CFD trading provides you with the advantage of being able to enter/exit trades at a more favorable price, giving you an edge over traders making use of a market maker broker. When an order is placed, it is instantly displayed on the exchange and therefore affects the price of the share on which the CFD is based. This is why DMA CFD traders can be referred to as "price makers" as they can influence the market directly.

Here are the pros and cons of DMA (Direct Market Access) brokers:

Pros:

• DMA brokers offer fast execution speeds in milliseconds.
• DMA brokers provide tight spreads due to direct access to markets.
• DMA brokers offer transparent pricing and trading conditions.
• DMA brokers can handle large trading volumes.
• DMA brokers provide direct access to markets, eliminating intermediaries.
• DMA brokers do not requote prices, ensuring traders get the best available price.
• DMA brokers have a low conflict of interest, as they don't profit from client losses 

Cons:

• DMA brokers often require higher minimum deposits.
• DMA brokers may charge commissions or markups.
• DMA brokers may have complex systems, challenging for beginners.
• Some DMA brokers may offer limited support or resources.
• DMA brokers may face risks if liquidity providers (LPs)  fail or experience issues.
• DMA brokers may experience slippage during high volatility or illiquidity.
• DMA brokers require traders to have a good understanding of trading and market dynamics.

Differences Between Broker Model

Note;

• ECN and STP brokers join traders to external liquidity providers, while Market Makers internalize order flow.
• ECN and STP models typically offer good trading conditions, with tighter spreads accompanied by lower commissions.
• Market Makers have a high conflict of interest, as they profit from client losses.
• STP brokers can have little wider spreads than ECN brokers, but yet offer better conditions than Market Makers.

What To Choose?

It is very important to know which broker model to use between ECN, STP, and Market Maker, but it depends on the trader's experience, goals, and preferences. Choosing a broker that offers a guarantee on your deposit and good trading conditions is necessary. 

Unregulated offshore companies have lost the trust of traders, who more readily choose to trade with regulated brokers with a reliable and recognized jurisdiction.

The STP/ECN model is of more benefit for brokers because the cost to obtain a license in a "serious" jurisdiction (for example, the United Kingdom) is lower than for a Market Maker license, and the regulation is less restrictive.

Market makers Model brokers are very popular but they are also one of the worst types of brokers you can choose because they win if you lose money, and vice versa. If you would like to work with reputable, trustworthy, and friendly brokers, then you should focus on ECN or STP brokers.

Factors you should consider while choosing a broker model;

• Trading strategy: ECN for scalping, STP for balanced trading, and Market Maker for simplicity.
• Account size: ECN for larger accounts, STP for medium accounts, and Market Maker for smaller accounts.
• Spread sensitivity: ECN for tight spreads, STP for competitive spreads, and Market Maker for wider spreads.
• Fees: ECN for lower commissions, STP for competitive fees, and Market Maker for no commissions.
• Trading experience: ECN for experienced traders, STP for intermediate traders, and Market Maker for beginners.

Ultimately, choose the broker model that aligns with your FX trading goals, risk tolerance, and preferences.

FAQ

What is the best broker to trade forex?

The following are listed based on global usage, excellent rating, best trading experience, and Awards;

CMC - Excellent Overall, best platform technology 

Forex.com - Excellent all round offering

Charles Schwab - Award-winning thinkorswim platform

XTB - Great research and education

eToro - Best for copy and crypto trading

What is the difference between STP and ECN Broker?

STP brokers are similar to ECN brokers in that they both use no-dealing-desk models which offer direct market access. However, ECN brokers route transactions to a pool of liquidity providers in which they work. They also tend to offer larger minimum lot sizes (0.1, or 10,000 units of the base currency).

How do you know if a broker is STP?

1. Check if the broker is regulated by a reputable authority, such as the FCA (UK), ASIC (Australia).
2. Look for explicit statements on their website indicating they are using STP broker model.
3. Check if the broker mentions "direct market access" or "straight through processing" in their order execution policy.
4. Verify if the broker discloses their liquidity providers, such as banks or financial institutions.
5. STP brokers typically offer competitive spreads and transparent commissions.
6. Ensure the broker does not have a dealing desk, which would indicate they are a Market Maker.
7. Check if the broker offers a platform that allows for fast and efficient execution, such as MetaTrader or cTrader.
8. Be certain the broker mentions fast execution speeds, typically measured in milliseconds.

Which Trading is best for beginners?

Forex is the largest financial market, offering an excellent starting point for a beginner with;

• High liquidity
• 24/5 market access
• Leverage options
• Relatively low barriers to entry