Investing online through a
Market maker or an ECN

Online investment can be made through two different types of brokers: market makers and ECNs (Electronic Communicating Network). Before starting to trade, the investor must determine which type of broker is the best for him. Both of these type of brokers have several advantages and disadvantages.

Trading through an ECN

First of all, the beginner investor must understand what is an Electronic Communicating Network. ECNs are the connection between market participants (for example: individual investors, banks or other market makers). The ECN displays the incoming offers and bids of the market participants for other market participants. Because of this the market is determined by them, so there is no fixed spread (spread is the difference between bid and ask price).

ECNs charge commission for each trade made through their trading platform. The commissions depend on the ECN. Mostly the charges are dipping when the traded amount is more at a fixed time period.

ECNs usually have better bid/ask prices, because the incoming offers come from more market participants. The prices are more volatile, because they are influenced by more trader. This can be an advantage for scalpers. ECNs pass all of the orders for someone else, so they are not motivated to trade against the market participant.

On the other hand, electronic communicating networks usually do not have a user-friendly trading platform (developing a user friendly trading platform has got huge costs). The price of the instruments are more volatile, so to determine a stop-loss is more difficult. The ECN charges for all of the exercised transaction.

Trading through a market maker

Market makers have got own trading platforms, too. But they set their instruments prices, which are mostly following the prices of the instrument. The market maker company must make a deal with the market participant on his quoted price. These companies stay on both side of the market, so when the investor is buying an instrument, the market maker must sell it and when the investor is selling an instrument, the market maker must buy it. These companies offer a larger spread for the investors and they benefit from the spread.

Market makers have usually a very user-friendly tradnig platform. The quoted prices of the instruments are less volatile, which is more confident for beginner investors. A market maker company is more often used for long time investments, not for active day trading.