Foreign exchange is an unregulated market that is not traded on an exchange, which means that prices you see and get from one broker could vary from those of another broker. There are mainly two types of brokers. One type is an ECN (Electronic Communications Network) and another a Market-Maker.
Market-makers have set the prices on their systems based on what they think is best for themselves as the counter-party. This is because every time you sell, they must buy, and when you buy, they must sell to you. This is why they can give you a fixed spread since they are setting both the bid and the ask price.
Many of them will then try to hedge or cover your order by passing it on to someone else; however, some may decide to hold your order, and thus trade against you. This can result in a conflict of interest between forex trader and the market-maker.
So how do ECNs make money then? They do so by charging you a fixed spreads for each transaction. ECNs, on the other hand, pass on prices from several banks and market-makers, as well as from the other traders in the ECN, and display the best bid/ask prices based on these input. This is why sometimes you can get no spread on ECNs, especially in very liquid currency pairs.
Market-makers have set the prices on their systems based on what they think is best for themselves as the counter-party. This is because every time you sell, they must buy, and when you buy, they must sell to you. This is why they can give you a fixed spread since they are setting both the bid and the ask price.
Many of them will then try to hedge or cover your order by passing it on to someone else; however, some may decide to hold your order, and thus trade against you. This can result in a conflict of interest between forex trader and the market-maker.
So how do ECNs make money then? They do so by charging you a fixed spreads for each transaction. ECNs, on the other hand, pass on prices from several banks and market-makers, as well as from the other traders in the ECN, and display the best bid/ask prices based on these input. This is why sometimes you can get no spread on ECNs, especially in very liquid currency pairs.
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