There are two types of forex broker, an ECN broker (which stands for ‘Electronic Communications Network') and a ‘market maker'.  An ECN broker is a broker which provides forex traders access to a market where numerous forex market makers, banks and financial institutions enter competing bids and offers into the system.  Since each forex market maker is competing against each other, the spreads tend to be very tight, and a forex market maker is able to place a bid or offer inside the spread.  The ECN broker will display the best bid/offer price from the market makers on their platform. This enables forex traders to take advantage of very tight spreads.  To access these prices, forex traders are charged a small fee, or commission.

On the other hand, a market maker provides a market for a particular currency pair, and is prepared to buy or sell that currency pair for a particular bid or offer price. In other words, the forex market maker is the counterparty to the forex trade you are making.  A forex market maker makes its money from the bid to offer spread.  These spreads are usually fixed (although some forex market makers may reduce this spread during active trading periods, and increase them during quiet periods).

Many forex market makers will offer traders fixed spreads. However, because an ECN broker is displaying prices offered by numerous market makers, the spread often varies.  During very active trading periods (such as during the European trading session), it is possible that there will be no spread at all between the bid and the offer price, at least for currency pairs that are heavily traded such as EUR/USD, USD/CHF and USD /JPY (although you will still need to pay the commission).

Market Maker or ECN - which is the best? 

Which is better?  This is hard to say.  If you can afford to open an account with an ECN broker, then on balance this is to be recommended.   However, with some ECN brokers you can only open an account with a minimum deposit of $10,000 or even $20,000. 

The benefits of trading with an ECN broker may appear obvious:

Tighter spreads - because an ECN broker gets its prices from various sources, the spread is usually tighter, and in fact you can sometimes trade on no spread at all.

ECN brokers don't trade against you - they are not the counterparty to your forex transaction, they are merely passing on the prices from other forex market makers, and providing a means for you to trade on their platform.  ECN brokers make their money from charging you a small commission for using their platform.

ECN brokers don't manipulate prices - it is very easy for forex market makers to manipulate prices, in order to ‘hunt' stops, or to ensure that a forex trader's position is not taken out for a profit.  Because forex market makers are able to trade against you, this represents a clear conflict of interest between the forex broker and the forex trader.  This is not the case with ECN brokers.

Increased volatility - prices can often be more volatile with ECN brokers, as prices are derived from numerous forex market makers, and this can help forex traders who rely on scalping strategies.

However, there are a number of disadvantages of trading with an ECN broker, as opposed to a market maker:

Most ECN brokers do not offer integrated charting packages or news feeds - nearly all forex market makers offer a free charting package with their trading platform.  In addition, most market makers will offer traders the opportunity to open a demo account first, prior to opening a live trading account.

Trading platforms not user friendly - the trading platforms of many ECN brokers are not very user friendly.  On the other hand, market maker trading platforms are often more user friendly.

ECN brokers charge a commission - forex market makers just make their money from the bid/offer spread.

High minimum account balances - these are sometimes very high for ECN brokers, and can be as high as $10,000 or more.  These make ECN brokers out of reach for many forex traders.