Market Makers vs. an ECN

What is the difference between a Market Maker and an ECN (Electronic Communication Network)?  Let’s describe the two entities and then compare them.

Market Maker

In a nutshell, a Market Maker is an entity which is typically defined as a broker-dealer that quotes positions on the buy and sell price for financial vehicles such as currency, commodities or indices.  There is a tremendous amount of competition between Market Makers to offer the best prices possible for their clients.

One of the primary roles of a Market Maker is to provide the trader the ability to buy or sell rapidly as opposed to having to find another trader to buy from or sell to.

When you place an order though the Market Maker they will either buy from the trader or sell from their own inventory.  The role of the Market Maker is to make a market for the financial vehicle.

ECN

An ECN is really a computerized exchange which allows traders of financial vehicles such as currency, commodities or indices an alternative to trading directly with your traditional exchange.  The ECN allows brokerages as well as individual traders to place transactions between one another without going directly through a middleman.

The beauty behind an ECN makes buying and selling of financial vehicles seamless amongst traders.  So, what is the difference between A Market Maker and an ECN?  There are several differences between the two but the ones that stand out the most may sway the trader’s decision on which one to use.

There are several market makers that allow traders to begin trading at a fraction of what a typical ECN will allow the trader to start trading at.  Also, some ECNs expect daily volumes substantially higher than do Market Makers.  If the trader is not well capitalized they may not have the option of trading with an ECN.

Volatility is of great importance when trading in the currency, commodities or indices markets.  The potential volatility is much greater on ECNs due to the fact that there are so many traders speculating at a single time.  Many traders welcome volatility when placing orders, however, if a trader prefers less volatility based on their strategy, the Market Maker can generally minimize this because they are risking some exposure.

Conclusion

Both ECNs and Market Makers play a significant role in a trader’s strategy, however, ECNs are typically better for experienced day traders and scalpers while Market Makers have a tendency to be a more conservative environment.

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