Pros and Cons of Market Maker vs ECN Brokers [2025 Guide]

Participating in the financial markets is based on trading platforms and brokers. Traders must choose between a market maker or an ECN (electronic communications network) broker when choosing a brokerage. Inherent strengths and weaknesses are internal to these two, and evaluations of each of these must be done when considering them relevant to individual trading needs and priorities. In this article we will discuss the pros and cons of market makers versus ECNs and the key differences between them.

Overview of Market Makers and ECNs

When you compare Forex brokers, you’ll often encounter two main types: market makers and ECN brokers. 

A brokerage that provides liquidity and pricing for securities on its own account is a market maker. In other words, they will trade securities using their own capital at prices they set themselves, becoming the counterparty to customer trades. This advantage is that it gives liquidity and allows for market orders. There is an inherent conflict of interest between the trader and broker.

An ECN broker instead directly matches customer orders with other participants on their electronic network. Rather than taking the other side of trades themselves, they act as the middleman and take a small fee. This avoids conflicts of interest but means traders must find a match for their orders themselves. ECN brokers usually cater more for active and professional traders.

Key Differences Between Market Makers and ECN Brokers

There are some fundamental differences between market makers and ECN brokers:

Dealing Desk vs No Dealing Desk – Market makers operate a dealing desk model and take the opposite side of client trades. ECN brokers use no dealing desk and directly match orders between participants.

Liquidity and Pricing – Market makers can provide liquidity by taking the other side of trades, even in thinly traded markets. But pricing is set at their discretion. ECN pricing is set by the market, but liquidity depends on order flow.

Transparency – ECN brokers offer complete transparency by giving clients direct access to the interbank market. Market makers are less transparent over how prices and spreads are set.

Fees – ECN brokers may charge commission fees on trades but have tighter spreads. Market makers do not charge commission fees but have wider spreads to cover their risk.

Pros of Using a Market Maker Broker

Market makers can provide some advantages, such as liquidity and stable pricing. We’ll discuss the main benefits market maker brokers offer.

Provides Liquidity and Stable Pricing

The main advantage of using a market maker broker is the liquidity and pricing stability they can provide. By taking the other side of client orders, they can provide liquid markets even for low volume or exotic instruments that may be difficult to trade otherwise.

Less liquid markets are also susceptible to slippage and gapping. But market makers can mitigate this by continuously providing buy and sell price quotes. So there is likely less slippage compared to purely matching client orders in an ECN network.

Tighter Spreads for High Volume Traders

For active and high volume traders, market makers may offer reduced spreads or discounted commissions compared to ECN pricing. This makes them attractive for institutions, banks, and hedge funds that trade frequently in large transaction sizes.

The market maker generates higher profits from the spread as trading volumes increase. So they have an incentive to provide attractive pricing to their most active clients.

No Commission Fees

A zero commission fee structure is commonly offered by many market making brokers. This helps reduce overall trading costs, making them appealing to low or moderate frequency traders. Trading costs are covered through the wider spreads quoted.

An ECN broker will typically charge a small commission fee per trade on top of the tight raw spreads they provide from the market. These commission fees can quickly add up for active traders.

Cons of Using a Market Maker Broker

However, the market maker model also comes with some downsides that should be considered. We’ll look at the key disadvantages and issues with using market makers.

Potential Conflicts of Interest

The largest downside to a market maker broker is the inherent conflict of interest that exists. There may be instances where the broker profits from creating wider spreads or trading against the client.

For example, if they see a large client order about to move the market, they may quickly buy or sell ahead to profit from the expected price change. While market makers are required to uphold ethical standards, the model itself permits such behavior.

Lack of Transparency

With an ECN broker, you can clearly see the liquidity and pricing being offered from institutions, banks, and other participants. This creates complete transparency over current market conditions.

But with a market maker, visibility over pricing and liquidity is obscured behind the singular entity providing quotes. You have less insight into where the exact pricing is coming from or how competitive it is compared to the wider market.

Requotes and Slippage

Sudden volatility or order imbalances can cause instability in market maker pricing and liquidity provision. This may lead to a number of requotes received when attempting to place orders. Requotes occur when the broker fails to honor the original quoted price.

Slippage may also be more likely compared to ECN brokers during moments of unexpected volatility or gaps in pricing. This is because the market maker temporarily fails to bridge the buy and sell prices.

Pros of Using an ECN Broker

On the other hand, ECN brokers provide transparency into real market access and conditions. Here we will cover the biggest pros of using an ECN for trading.

True Market Access and Transparency

The biggest advantage of an ECN broker is providing direct access to pricing and liquidity from a range of participants. This includes pricing from top banks, financial institutions, hedge funds, and other traders on the network.

You get a transparent view into current market depth and sentiment across these entities. The ECN broker is not obscuring or filtering any information. This also allows taking advantage of short-term opportunities and imbalances in liquidity before the market maker can react.

Lower Conflicts of Interest

Since an ECN broker is not the counterparty to your trades, there are minimal conflicts of interest that can undermine the ethics of order execution. The ECN broker simply passes your order through the network where it is matched with a corresponding order from another participant.

The broker does not gain any advantage from trading against you or creating wider spreads like a market maker potentially can.

Tighter Average Spreads

Spreads provided through ECN networks are often tighter compared to market maker spreads. This pricing comes directly from banks and institutions competing openly with each other for order flow. This delivers the tightest spreads on average during normal market conditions.

Market makers must maintain wider spreads to protect their risk exposure and profit margins. An ECN broker has no risk exposure so can simply pass on tighter spreads to clients.

Cons of Using an ECN Broker

Despite their advantages, ECN brokers also have some cons traders should be aware of. Coming up are the biggest downsides to direct market access through ECNs.

Low Liquidity in Exotic Markets

The biggest downside of ECN brokers is potential lack of liquidity in some markets or at certain times. During off-peak trading hours for an instrument or asset class, there may be limited buy and sell orders going through the network.

This can increase the likelihood of partial order fills or slippage occurring. So ECN brokers work best when trading major pairs and markets with consistently high liquidity. They are not ideal for exotic or thin markets.

Vulnerable to Volatility and Gapping

Mirroring the live market also comes with the risk of volatility spikes and price gaps. With a market maker broker constantly providing pricing, gaps are less likely to occur during momentary volatility.

But on an ECN network, if a major headline suddenly hits the news, it can create a spike in market orders and volatility as participants react. If you have orders open during such events, slippage or gapping risk increases unless you use guaranteed stop losses.

Commission Fees

To offset the tight spreads passed through from the ECN, brokers will typically charge a small commission fee per trade. These fees range from 0 to 10 or so per trade depending on account type and trade size.

While the commissions are small, they tally up over time for high volume traders. So market makers can be more cost efficient for active traders when factoring their wider spreads against ECN commissions.

Comparing Market Maker vs ECN Pricing and Costs

One of the key considerations for active traders when selecting a broker is the pricing, spreads, commissions, and overall costs of trading. How do market makers and ECNs compare on transaction costs?

Market maker brokers offer zero commission trades. This appears simpler and cheaper. But by scrutinizing their spreads and price feeds, it becomes evident that their profits are built into wider spreads and occasional price mismatches between their platform and the broader market. These wider spreads, especially during volatile periods, result in materially higher costs than commissions payable at an ECN broker.

ECN brokers provide exchange-quality spreads, even bettering the exchange in many cases by aggregating liquidity across venues. Their electronic matching avoids any human or counterparty intervention which could widen spreads. When adding their small commissions, overall trading costs at an ECN remain significantly lower for the majority of actively traded securities and size ranges. Only for very small size trades does the zero commission model win out. But as trade size increases, ECN transaction cost savings compound dramatically. This advantage becomes exponentially larger during volatile trading conditions.

For larger trade sizes above the retail level, such as for high net worth investors, institutions, family offices, funds or anyone transacting above $100k per trade, ECN brokers also enable access to wholesale pricing through their integration of various dark pools and cross-connecting platforms. This can reduce trading costs by up to a further 30-50% again for medium and large size block trades.

Final Thoughts – Choosing Between a Market Maker or ECN

Deciding between using a market maker versus ECN broker depends greatly on your specific trading needs and priorities.

For beginners and casual investors who make infrequent small trades, simply want an easy to use investing app, and have limited capital, a market maker provides an excellent solution. Their guaranteed liquidity, zero commissions, and simple order types are well-suited for this demographic.

However, for active, professional, algorithmic, automated or volume traders, an ECN is almost always the superior choice. The combination of best pricing, full transparency, advanced functionality and order types enables substantially improved performance and results. The small commissions payable are negligible in the context of these advantages.

While market makers have simplified the access to trading for casual investors, those with more experience, larger trade sizes, or priority for best pricing over simplicity should carefully evaluate switching to an ECN broker. The enhancements around transparency, spreads, order types, and advanced trading tools can elevate trading outcomes to a considerably higher level over a traditional market making brokerage.