What is the difference between ECN, STP & Market Maker?

There are many significant differences between Market Makers (MM), ECN (Electronic Communications Network) brokers and STP (Straight Through Processing) brokers but in order to fully understand all the differences between these types of brokers traders first need to know how they process trading orders, how they handle lot sizes and more important if they ask for dealing desks or not.

Market Maker

  1. The MM (Market Maker) which is also known as the DD (Dealing Desk) is a unique type of broker because it does not reflect the market in a direct way instead it just quotes prices similar to the pulse of the trading market.

    Any kind of orders entered are processed first internally and never step out towards the market.

    A very good feature of the MM is the speed of the execution without any additional re-quotes.

    The only negative side of the market maker is that any capital gain leaves the broker’s account into yours and any capital that you happen to loose ends up in the broker’s account, this translates into a serious conflict of interest.

Straight Through Processing

  1. The Straight Through Processing is also known as the STP and it represents a technology that does not require any kind of dealing desk because all types of orders are rerouted directly towards the broker’s liquidity providers. In turn, prices are directly executed on the bid or ask rate provided by the liquidity providers.

    In this specific case, the liquidity providers are the big banks, hedge funds, and investors that take the role of counterparties to each trade. In most cases, the STP broker incorporates a liquidity pool which is represented by many liquidity providers that are in competition for the best bid/ask spreads.

    In other words, STP means that the broker acts exactly like an invisible connection provider between the user (the trader) and the financial market.

    A nice feature of the STP is DMA which stands for Direct Market Access, this means that a broker is channeling the client’s orders directly to their liquidity area, therefore, orders are used at peak efficiency with the best prices with just a small mark-up spread.

    Another positive fact about the STP is that there is only a minor, insignificant, conflict of interest because of the high accuracy of the prices.

Electronic Communications Network

  1. The Electronic Communications Network is also known as the ECN and this is the place where brokers let you gain full access to the trading market, therefore a reliable ECN broker grants you the possibility to see the real prices of the trading market without any kind of filters and also presents them in the right order.

    It is here where you trade with other traders and financial institutions. An important fact worth remembering is that you never get the option to trade against your own broker.

    Some time ago the MetaTrader4 ECN seemed a bit too excessive as a matter of fact the initial reaction to this innovative concept was that it is too good to be true thus it was deemed impossible by many market participants. This type of broker is considered to be very ingenious because it provides a more direct approach.

    The STP and the ECN brokers are similar in many ways but the main difference between them is routing because the STP can pick a different liquidity provider out of their liquidity area, while the ECN behaves more like a hub. This hub acts mostly as a very efficient and dynamic liquidity source because it is backed up by banks, hedge funds, and other significant market members.

    A nice feature about this is that there is absolutely no conflict of interest, but it does guarantee fills and the smallest possible lot is 100,000 and it also involves a commission.

Ending ideas

  1. To put this into a nutshell you can make money easily and consistently with MM (DD), ECN, and STP brokers without having to be tensed about any kind of problems, but it is worth mentioning that a MM market maker broker can bring some fluctuations to the profit-making process. A reliable broker will always deploy a serious amount of effort in offering the best services for you.

What are MAM and PAMM?

MAM and PAMM are two account management methods that allow managers to directly administer several accounts at once from a single terminal without having to create an elaborate investment fund.

The profits and losses of these two methods of management are distributed evenly among the managed accounts. These accounts are connected directly to the account manager’s main account therefore all trades are made instantly by the manager and the results of the trading actions can be seen in the clients’ accounts summary.

What is a PAMM account?

  1. The Percentage Allocation Management Module, also known as PAMM, is an account that features a simple management module that splits the size of trades in accordance with an allocation percentage. This is a simple yet highly efficient solution offered by many professional Forex brokers in order to ease the access of investors and fund managers. With the help of a PAMM account, a trader picks if his account can be managed by one or more managers simultaneously.

    PAMM is considered to be a very smart method of conducting management actions over several accounts on behalf of clients by investment managers.

    This type of system is usually simplified with the help of a broker that takes a certain amount of funds from the investor and continues by enabling the account manager to deploy specific trading services: manual or automated. Combining these two methods ensures a greater chance of success for all the parties involved in the trading process.

    A PAMM account is considered to be the main account and it incorporates a monetary capital that is equal to the sum of all the sub-accounts.

    There is an option where all trades are automatically duplicated in the sub-accounts based only on a strict predefined percentage. There are, of course, some exceptions in which the managers of the accounts are not entitled to the entire array of trading actions, or they only act with only a limited number of actions. As a safety measure, there are some cases where the investors are the only ones capable of making deposits as well as withdrawals.

What is a MAM account?

  1. A MAM is also known as a multi-account manager and it shouldn’t be mistaken for the MetaQuotes multi-terminal system, which, in comparison to a MAM account has many limitations. A MAM account enables its customers to make use of an allocation method, this method is similar in many ways to a PAMM account, but it grants a better dexterity in allocating the trades and risk adjustments based only on the type of risk profile.

    A manager can simply share trades on a predefined basis and this means that he can configure the number of traded spots by each and every individual account. This fixed allocation technique can also be done using a Lot Allocation Management Module also known as a LAMM account.

    The manager also has the ability to modify the amount of leverage value on the accounts and this comes in only when the users demand a bigger level of risk.

    The multi-account manager accounts are specifically designed for account managers and it enables them to modify the level of complexity as well as the value of potential returns. This action can be made by assigning higher leverage to some sub-accounts.

    Other efficient measures also include adjusting leverage as well as a risk-management option on various sub-accounts, this in return offers a lot more flexibility and choice on the trading markets. A lot of caution needs to be taken here because changing the risk levels can be extremely dangerous for the account, but it can also generate a significant amount of profit.

    In short, the multi-account manager is perfect for investors that use a high-risk tolerance which definitely requires great knowledge of the market fluctuations.

Ending ideas

  1. It is a well-known fact that most Forex traders often turn to the advantages of investing in a well organized managed account after failing themselves on the market.