ECN Brokers: What Are They and Why Are They Beneficial?
When it comes to the foreign exchange market or other markets like Forex, you may have heard the term — ECN broker. These two words are widely used but not many people realize what they actually mean. If you are starting your journey down the foreign exchange market and want to know more about ECN brokers, who they are and how they can help you, then this guide will give you a rundown of what an ECN broker is and why they can be so beneficial to you. Let’s get started!
What Is an ECN Broker?
An ECN Broker is a broker who works within the Electronic Communication Network, that is in relation to the foreign exchange market. An ECN broker works by passing your order across to the interbank market or to liquidity providers. What this means is your trades are continuously being matched with other types of traders within the real market (organized like an exchange). There are many ECN brokers available to open an account with but it is important to compare different brokers via websites like EarnForex to help lead you along the way.
How an ECN Broker Works?
ECN brokers generally gain their money on the ask/bid spread. This means they want traders who are profitable and active, which will keep executing lots of trades in terms of volume. They create a combined list of the best asking prices and the best bids from liquidity providers such as financial institutions and major banks. They then match trades with the lowest spreads and the best possible prices without consideration for the source. Overall, an ECN broker is like a middle man between the seller and the buyer who does not have any interest in price manipulation but may be able to leverage the market to your advantage.
About ECN Trading
ECN trading is similar to a bridge that links small participants in the marketplace with liquidity providers via an ECN broker. This bridge is achieved by the use of FIX protocol technology or Financial Information Exchange protocol. This technology automatically matches and fills requested orders based on the best available prices.
Advantages of Using an ECN Broker
Some of the benefits of using ECN trading and an ECN broker over other types of trading solutions include, but are not limited to:
- Immediate Trade Execution — ECN clients have the ability to instantly trade Forex. This can be done by taking advantage of the best executable live streaming prices on the marketplace with immediate confirmations. ECN trading reduces the risk of price maker interference meaning that all trades done through this type of trading are confirmed as soon as they are dealt and filled. There are no requotes or interference of any kind.
- Liquidity Access by Clients — ECN trading offers clients the opportunity to trade in a liquidity pool that stretches globally across regulated, competitive, and qualified financial institutions.
- Variable Spreads — ECN trading can also provide access to true variable spreads because there is no market maker or dealer controlling the offer or bid spread. Through such broker, you will have access to overall market prices directly. Market prices usually fluctuate depending on the demand, supply, volatility, and other market conditions. This allows clients to trade on tighter ask/bid spreads, which can be lower than one pip depending on market conditions.
- Automatic Data Feed — With ECN trading, clients can access and connect with expert advisors, trading algorithms, and risk management systems via the automatic live data feed. The market data includes the available asking prices and competitive bids at any given time. This means that the trading process continues to remain consistent and reliable for live trading or backtesting trading models.
- Anonymity — ECN trading activity has the ability to be anonymous. This allows traders to take advantage over the neutral pricing, which ensures real market conditions are reflected in the data feed at all time. Because of this, there is no bias on the client’s direction when it comes to tactics, trading strategies, or current market positions.
- Price — ECN brokers do not manipulate their spreads. When trading with an ECN broker, you are getting the best prices available at that specific time.
How to Find the Right ECN Broker
Finding a true ECN broker can be quite difficult. Especially if you are not sure where to start. Here are some tips on how to find the right ECN broker for your individual needs.
- Legal Identification — As a trader you have a right to ask for legal identification of your chosen ECN broker to know if their services are up to code within the country you live in. Without carrying out legal checks, you run the risk of turning your hard-earned cash into a wasted investment.
- Order Limits — Your order limits are the number of orders you can send to your broker, their maximum size, the total size of your positions, and so on. A true ECN broker will not mind how much you invest because the more you invest, the more commission they make out of it. If you find that your chosen broker is pushing you to specific deals, then they may only be in it for personal interest which means they are not a legit ECN broker.
- Reliable Updates — Your ECN broker should be able to provide you with regular updates on how everything is going with your trading account. A true ECN broker will continuously update you on how everything is going, explain to you anything you are not sure on, and also help you with any problem you will encounter.
An ECN Broker vs. Other Types of Brokers
When it comes to Forex brokers, there are three popular types that are spoken of:
- Market Maker
- No Dealing Desk
- Electronic Communication Network (ECN)
While we have already spoken about an ECN broker, here is how they compare against other types such as the market maker and the no dealing desk broker.
Market Maker Broker
Forex market makers will normally provide their customers with a two-sided market which comes from a specialist Forex trader that operates in conjunction of the brokers in-house dealing desk. If there is a deal on price, the broker will take the other side of a transaction from their client and buy on the bid side or sell on the offer side of the quoted price.
The objective of a market maker is to capture a section of the spread to create sufficient volume on both sides of the market to do a high volume of trading on both market sides to avoid accumulated risks with other professional counterparties.
A market maker may also choose to offset trading immediately if the trade is large enough if they think the market might move against it. Depending on the outlook of the market and the transaction size, they may also add it to their trading book.
No Dealing Desk Forex Brokers
The NDD or No Dealing Desk Forex broker means that they lack a dealing desk. While this may seem bad, it can offer them the best composite quotes which are mainly obtained by multiple Forex quote providers. This helps to give a No Dealing Desk Forex broker liquidity across the Forex market. Liquidity providers will work with NDD Forex brokers and post their best markets to them. The broker then works on executing transactions for clients by watching and filling orders for clients accordingly. They also usually charge commission or they work on widening the bid/offer spread in order to make small profits on each executed trade.
An ECN broker can provide anyone looking to get into FX trading some great benefits compared to other types of brokers. If you are new to the foreign exchange market, it is best that you do your research to find an ECN broker that offers reputable services suitable for your needs. While there are so many different brokers available in the industry, looking into ECN brokers may be the best option for your overall trading needs because of their benefits.