Chapter 1 Main Types of Forex Brokers
Forex brokers fall into two two types: Market Maker and ECN/STP.
Market Maker Brokers
When you open a live account with a market maker broker, indeed you are trading against the broker, not with the real world wide currency market. The market is the broker itself, that is why it is called a market maker. Although they have the bid and ask prices the same as the other type of brokers, your orders will not reach the actual global forex market.
So, if you make profit, the broker has to pay it. And, the money you lose goes to the broker’s pocket. It means your profit is the broker’s loss, and vice versa. The general term for this kind of broker is B-book broker. A trader who makes steady profit is their biggest enemy, and over 95% of the time traders lose in a bet against a B-book broker.
ECN/STP Brokers
An ECN broker refers to a broker where the quotes are the result of the broker going out there and looking at lots of potential prices and getting you the best price. An STP broker is a broker where your orders go straight thru the market. These two types of brokers are also known as A-book brokers.
Unlike market maker brokers, ECN/STP brokers just route your orders to the banks that are also known as liquidity providers. They connect the platform you install on your computer to the liquidity providers’ computers.
ECN and STP brokers don’t make profits from your losses, nor they lose if you make profit. Most of them even help their clients to make profit and grow their accounts, because they will stay with the broker longer and will make bigger positions, and this means more money for the broker too. They usually charge through commission rate or spreads. That is why it is a widely accepted opinion among traders that these brokers are more reliable and profitable compared with market makers or B-book brokers.
Many forex brokers adopt hybrid models by combining both A-book and B-book in order to build long-term relations with their clients. Brokers have dedicated software which can help categorize their customers based on information such as deposit, leverage used, risk, protective stops, lot size, etc.
