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In the past, the forex market was only open to the wealthy individuals and institutional investors. The emergence of sophisticated online forex brokers made forex trading feasible for private individuals like you and me. Compare forex brokers. Know these forex broker games. Understand forex charts.

Many forex brokers tend to entice new trades by offering high leveraged margin accounts. Now anyone can open a forex trading account with a retail forex broker and trade currencies with little money upfront.

Market makers set the bid and the ask prices themselves. There are basically two types of forex brokers: 1) Market Makers and 2) Electronic Communications Networks (ECNs).

ECNs consolidate the various bids and ask prices from the different market makers and other participants connected to their platforms and display the best available prices. Market making is a lucrative business for banks and brokers and forms the backbone of market liquidity.

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Market makers are essentially providing liquidity and inviting other qualified parties like banks, hedge funds, corporations and retail investors to deal with them by quoting the bid and ask prices on the screens of electronic brokering platforms or through telephone calls.

Market makers must always be prepared to buy or sell from other market participants. Some market makers establish credit lines with banks that trade on the interbank market. They also access the Electronic Brokering Platforms like the EBS and the Reuters for pricing.

The bid/ask spread is the difference between the price at which the market maker will buy (bid) and the price at which the market maker will sell at (ask) from the customer interested in foreign exchange. Market makers make profit from the difference between the bid/ask spread.

During the period of high liquidity in which there is a great deal of trading activity, bid/ask spreads of the actively traded currency pairs are usually kept quite narrow like 1-4 pips.

However, bid/ask spread may widen sometime by a huge margin when the market is quiet with very little trading going on for example prior to New York close on Fridays or during the news releases. Market makers widen the spread when the market activity is low in order to protect themselves against carrying additional risks.

ECNs are electronic trading platforms that match the buy and sell orders automatically at the specific prices. ECNs are highly popular in stock trading as well as futures trading.

In an ECN, the order is routed to the best available bid or ask price for execution in the system. An ECN broker gets its currency pricing from several liquidity providers such as banks, market makers or other traders connected to the system.

You can usually get tighter spreads on many currency pairs due to the large liquidity pool available with the ECNs. However, ECN brokers usually charge a small commission. Risk of trade manipulation is also minimized when using a good ECN broker as compared to the brokers that operate dealing desks.

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