This article assumes some knowledge of the way the forex market and forex brokers work. Contrary to popular belief, ECN's are not superior to Market Makers in every way. There are advantages and disadvantages on both sides.
Minimum Deposits
There are retail market makers out there today that allow traders to begin with $1 in their accounts. That’s not to say that this is a great feature, but it does present options to people who may not have the kind of money it takes to open a Currenex account. It’s a good thing too, because ECN contract sizes are often multiples of $1 million, and some ECNs expect a daily volume of $25 million. Shackled with those types of minimums, you had better be well Capitalized (with a capital “C”).
Leverage
ECNs don’t allow the type of high leverage that is typical of market makers. To most people this is no great loss, since it is generally not advisable to use anywhere near the leverage that is available at most retail market makers.
Transaction Costs
Whether they call it a spread or a commission is really irrelevant at the end of the day - no matter what, you have to pay to play. ECNs typically give you the prices they are dealt from their liquidity providers, with the exact same spreads, but then charge a commission for every round turn trade. This allows them to give discounts to high volume traders, lowering their costs, but to most traders, it is really irrelevant whether they are made to pay a commission with a tight spread or no commission with a higher spread. It works out to be roughly the same, depending on which brokers you are comparing, and what current spreads are like.
Volatility
The potential volatility is higher on ECNs because of their unfiltered slice of the market. By risking some exposure, market makers can generally mitigate this. Depending on the type of trader you are, volatility may be your friend or your enemy.
Stability of Business Model
The fact that a market maker is the counterparty to many of its clients’ trades, exposes it to market risk. While this risk should be well managed through appropriate hedging with a higher-tier counterparty, this may or may not be the actual case. Furthermore, even if the risk is well managed, it is still a risk. An ECN does not have to worry about this, as it provides only a service for which it charges a commission. At no point is an ECN exposed to market risk. What this means is that the likelihood of an ECN becoming insolvent is much lower than that of a market maker. This has serious implications for client funds which the broker is holding. On the other hand, any market maker worth its salt should keep client funds segregated from the company’s operating capital, itself be well capitalized, and keep risk management tight, therefore keeping clients relatively insulated against the possibility of broker bankruptcy.
Susceptibility to manipulation
While ECNs offer a “truer” participation in the market, the picture there is not necessarily prettier. The added transparency only brings to light the dog-eat-dog world that is the forex market. Trading with a market maker insulates your from that to some degree, but this can also be used to hide things from you. It is nice to have guaranteed stops, though, and you won’t find those on any ECN. Basically, in my view, ECNs are great for experienced day traders and scalpers, while market makers are better for everyone else, as long as they are deemed to be "honest".
