True to our promise to keep offering insightful information, advice and tips for existing but also aspiring forex online traders, this present post deals with the topic of ECN brokers, explaining what they are and examining whether and how trading through such brokers may be beneficial towards the trading endeavors and success chances of traders.
ECN is the commonly used abbreviation of the term Electronic Communication Network and it is used in the forex world to describe the way, in the form of what resembles a bridge, market participants, i.e. traders, are linked with trading liquidity providers, through forex ECN brokers. For this linking to be possible, it relies on sophisticated technology which is known as the FIX Protocol, which stands for Financial Information Exchange Protocol. In practice, this works by linking the two ends of a forex transaction. On the one end, forex broker clients are given access to liquidity as this is obtained by the forex broker from liquidity providers, while on the other end the broker sends to the liquidity provider the trading orders of its clients for execution. In essence then, the ECN is the automatic mechanism which matches the requested orders with liquidity providers, ensuring they are executed at the best available market prices.
If we approach the online, retail, forex market in a schematic manner, ECN (Electronic Communications Network) and STP (straight-through-processing) brokers occupy the one end, while the brokers operating under the market maker model and operating their own dealing desk, occupy the other. This core difference in essence means that ECN and STP brokers do not set the prices themselves, but allow the actual market to do so and they do not intervene in the fulfillment of client orders, allowing instead direct market access.
This differs from market-make brokers, who determine price themselves and some of whom have been found to be trading against their own actual clients. In view of this, it can be argued that the ECN trading model is superior, since it ensures that brokers never trade against their own customers, but instead allow them access to the actual market pricing of the financial instruments to be traded, as these prices are set by global liquidity providers and large banks.
Though there are certain ECN brokers specifically geared towards serving the trading needs of institutional investors, others are dedicated to serving retail investors, while most can cater to all investor types, in this way enabling small-scale, retail investors to benefit from the levels of quotes and spreads enjoyed by institutional investors. What are the advantages of trading through an ECN broker?
From the analysis above it emerges that the main advantage to be had when trading via an ECN broker is obtaining the best available market prices and the tighter possible spreads. Moreover, due to the fact that it relies on full automation, the ECN model also ensures super-fast execution speed for all trades. The biggest advantage of ECN brokers over their competitors however, is the fact that they usually do not use spread mark-ups to increase their commission revenues, but instead charge transparent, fixed commissions, which are more predictable and reliable and thus better, especially for novice traders. Another benefit of ECNs, especially relevant and instrumental in the case of forex trading, is the fact that they can also be accessed, with the same, if not better efficiency, during after-hours trading.
Furthermore, thanks to their direct market access technologies, ECN trading platforms and brokers obtain access to pricing from several liquidity providers simultaneously, eliminating the possibility of requotes and practically guaranteeing the execution of trades at the order price.
Another advantage, stemming from the fact that ECN brokers do not make money from the winning or losing trades of their clients, but from the size of the overall deal flow, is the fact that they can accommodate and accept all trading strategies, including scalping. Accelerated execution speeds also mean that ECN platforms are the perfect trading venue for those traders using expert advisors for automated trading transactions, a method which is widely used on the most popular forex trading platform in the world, the MT4 trading platform.
Despite its several advantages, trading through an ECN broker may be more expensive than through a typical market maker broker charging fees in terms of spread mark-ups. As a general rule, most ECN brokers charge a commission on every trade placed. This charging method economically favours traders with higher trading frequencies and trading larger volumes, but is less favorable for low-volume retail traders, since commissions charged by most ECN brokers usually range between $2.50 to $5.00 per traded lot. This commission level may vary slightly depending on the actual trading platform used by each broker, as well as the account type that each trader chooses to open and trade through. Traders should also be aware that when trading in the CFD and Forex markets, they are vulnerable to sudden upsurges in variable spreads, especially at times of high market volatility.
Finally, opening a true ECN account via an ECN broker may come with a higher opening capital requirement than a standard account. This is because, contrary to market maker brokers who may intervene to provide liquidity on the trader’s behalf, ECN brokers shift the responsibility of meeting the market liquidity requirements on the trader.
In proposing that choosing an ECN broker to open an account with is a good, smart and wise idea that will enhance your chances for overall trading success and aid your trading endeavors, let us see a breakdown of the reasons why, this is so:
Just like attempting to choose the best forex broker for you, which we have already discussed in great detail in previous posts, choosing the right ECN broker is an equally challenging task. The endeavor is further complicated by the fact that many brokers claims to offer an ECN network, when in fact they are offering an STP network instead, the difference between the two being that STP brokers usually rely on a handful of liquidity providers, while true ECN brokers are connected to a far more extensive pool of different liquidity providers, usually in the double digits. To assist your quest and based on their huge experience, our team of resident experts has prepared this short list of tips containing the main aspects you should look out for, when searching for the right ECN broker for your trading needs and when comparing the offering of various such brokers:
Having identified them, let us now explore each of these the main aspects you should look out for in greater detail:
To be sure you are considering a true ECN broker, ask them to provide you with a detailed list of their liquidity providers and major banks they are connected to. If a detailed list is not available, then you should at least get an overview of the size and extent of the ECN network being relied on.
As already mentioned, ECN trading is possible via the MetaTrader4 platform, as well as with the MetaTrader 5. Before selecting your ECN broker check to see which platform they are using and how ECN trading works on that particular platform. Also check the quoted spreads on the broker’s platform, having in mind that usually in ECN trading, the spread for the popular currency pair EUR/USD is below 1.0 pip. If you see a higher spread you should better keep away and keep searching.
Before deciding to choose a specific ECN broker check out their order book as well, as this will allow immediate access and a clear view on liquidity and price positioning.
Additional trading terminal features It is also wise to compare the additional and special features offered by most ECN brokers, especially if one-click trading is on offer, as this is particularly useful for active day traders.
Overall, try to discern prior to opening an account, that the ECN broker you are considering will automatically match your order directly, rapidly and transparently. To make sure this will be the case, it would be a good idea to open a demo account and check out how the broker works and responds without risking any real funds, while gaining first hand experience and an educated opinion on whether the features and functionalities offer best suit and serve your own needs.
And as with choosing any type of broker, do not open an account with an ECN broker before you know in detail their minimum deposit requirements, trading costs, spreads and which deposit and withdrawal methods are being accepted. Many will argue that you shouldn’t choose an ECN broker unless fully regulated by a watchdog in a specific jurisdiction, but as we have repeatedly argued in the past, we do not agree that all unregulated brokers should be dismissed a priori. Perhaps more important than their actual regulatory status, is a broker’s commitment and ability to convincingly demonstrate that it is reliable and trustworthy, and actively protecting their clients’ deposits.
Osprey FX broker, is a prime example of such an ECN broker, and we have referred to them in previous posts as well to highlight how innovative a broker they are. What makes it especially attractive as a true ECN broker are their lightning speed in trade execution, as well as their very competitive and low spreads, for example the average EUR/USD spread, which is just 0.1 pips.
By aggregating liquidity from over 50 different banks, the OspreyFX ECN account can cater to all trading styles and cover the needs of day traders, scalpers and expert advisors as well.
Despite their fixed commissions, ECN brokers are proving very popular with traders and this trend looks set to continue. ECN trading platforms are ideal for day traders, scalpers and those using hedging, as well as EAs alike and this is one of the main factors fueling their popularity, as they cater for the needs of different types of traders, following different trading strategies. Fast order execution, instant confirmation, smaller bid-ask spreads, and direct connection to the liquidity providers, are the main strongpoints of any reliable ECN broker and traders across the world are attracted to the stable and reliable trading environment that these features create for them, coupled with complete transparency when it comes to fees and charges.
ECN brokers are more attractive to many traders and actually better than STP brokers because they do not act as middlemen, but connect their clients directly to the market. This means a more instant opening and closing of trading positions and also does not allow the broker to trade against the client. Moreover, due to the fact that they rely on an extensive network of liquidity providers and banks, ECN brokers can secure more price quotes, which means higher bid and lower ask prices, effectively minimizing the spreads and lost payouts.
The short answer to this question is no, and this could perhaps be considered as one of the greatest disadvantages of ECN forex brokers. Larger initial deposit requirements, render ECN trading more costly and therefore ECN brokers do not offer their clients the chance to trade in micro-lots. So, if you are planning to trade in small position sizes then you should not choose an ECN broker or ECN trading account type.
ECN brokers are able to offer lower spreads because they aggregate and combine an extensive network of liquidity providers and their price quotes. This allows them to always be offering the most suitable conditions and offering for their client-traders, i.e. always ensuring their clients get access to higher bid and lower ask prices.
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