If we trade "off-exchange", with whom do we "exchange" with?

If we as small traders trade off-exchange(off of the real market), then with whom do we trade with? I know that if my broker (Gain/Forex.com) is a "market maker", that they will sometimes(or is it all the time?) trade against me. But what if I use an ECN like MB Trading? Then with whom am I trading with? Thanks!

Firstly, off-exchange (or OTC) doesn't mean 'off the real market', it means trades are executed between two parties as opposed to through an exchange, ie off-exchange. Brokers derive their prices from various liquidity providers and then adjust them according to their business model. They then stream their quotes to you, the trader, to trade on.

Mostly your broker is counterparty to your trade, in other words he takes the other side of your trade. You sell, he buys. Depending on the size of your trade he may offset his exposure (his risk) with one of his liquidity providers, or he may hold your trade in-house and offset it against another trader's trade(s), or he may hold it until he has a sufficient size to offset it, or he may just hold it in the expectation you will lose.

Although there is a potential conflict of interest between you and your broker most brokers rarely target individual traders, they quote according to their book and the underlying market so try not to get paranoid that your broker is trading 'against' you, chances are he doesn't care whether you're making money or not.

Thanks for the info, pipmutt. Talk about a conflict of interest!! That completely makes sense with a market maker...but what about traders who trade through ECN's like MB Trading? I'm thinking about making the move to an ECN...that's why the thirst for info. Thanks!!

ECN's like MBT are fine but they're still counterparty. They do actually say they offset trades on an STP (straight through processing) basis, but they're still intermediary between you and their liquidity provider, they have to be because you don't have any lines of credit to be able to trade directly. If I remember correctly they also say they may get a better price than they offer you. In theory a conflict of interest could still exist but again they're not interested in whether you make any money or not as long as you stay trading with them.

The ECN-style models (like MBT) sprung up when traders were complaining about the old type of rogue bucket shops who would literally steal your money by using all sorts of blatant tricks. Traders understandably wanted transparency so along came the ECN-style shops to offer them what they wanted, I think it was a marketing tactic and it obviously worked. There's a good thread here on FF about bucket shops vs ECN's which is well worth reading....

http://www.forexfactory.com/showthread.php?t=8046

I guess the bottom line is if your broker fills your orders at prices which are acceptable to you, and at a reasonable cost, then what more could you ask for?

If you're worried about it then the other choice would be to trade a fully regulated exchange-traded product like futures, they're doing e-micro currency futures now but it's quite expensive and I believe liquidity isn't great, if costs come down then I imagine it will get more popular.

I think if you stick with any of the mainstream brokers then you'll be fine, ECN's or marketmakers.