When trading forex, direct access to markets and liquidity can be two of the most important factors for success. Many “traditional” forex brokers are known as “dealing desk” brokers. This means that they act as a middle man between yourself and liquidity providers such as banks, brokers, and other traders. Some traders prefer to bypass all of this completely with direct access to the market at all hours of the day.
This is where ECN brokers come in. ECN stands for “electronic communications network” and is essentially an automated tool that allows traders to have direct access to all stock and currency markets, regardless of their account size or leverage.
The benefits of using ECNs for traders can be immense if it is done properly. If you’re ready to cut out the middle man, you might be considering using a brokerage platform that offers full ECN access as part of their service package. If so, make sure to read this comprehensive guide to ECN brokers before you get started.
What Is An ECN?
As mentioned, ECN is an acronym for “electronic communications network”. These are automated, algorithmic networks that can give traders direct access to equity markets. It is, as the name suggests, a network that brings together all market participants in one place, where they can buy and sell forex with each other.
There is no dealing desk, meaning that you can participate directly in the market and find the best buy and sell prices for you. As you already might know, many brokers act as market makers and thus charge a “spread” to cover the cost of their services (i.e. facilitating forex trades). When you are using an ECN broker, you do not have to pay as much spread (i.e. the difference between the bid and the asking price of a currency pair).
Often, you will not have to pay any spread at all with ECN brokers. The ECN directly publishes orders that are entered by various market participants to individual traders and other third parties. These orders can then be automatically executed via an algorithm that matches the buy and sell orders at the best price available on the open market.
Linking traders, large and small, and with liquidity providers in a single network, meaning that your bankroll no longer has to be a barrier to accessing the forex markets you are interested in.
What Is the Difference Between ECN and a Standard Account?
Essentially, there are two types of forex brokerage accounts out there – market makers and ECN brokers. Market makers are the more “traditional” forex brokers, which act as middlemen to facilitate access to liquidity and will place their own spreads on forex pairs, from which they make their money.
A market maker will usually not charge commission on a single transaction, as their costs are usually covered by spreads. Therefore, the wider the spread, the more you are generally paying every time you buy and sell currencies on the global forex market. Meanwhile, ECN brokers use automated networks to connect you directly with market participants and liquidity providers.
An ECN algorithm will automatically match you with the best buy and sell prices on the market right now, eliminating spreads altogether and potentially saving you a lot of money. However, this service does not come for free. Given that ECNs require privileged market access and sophisticated technology, most ECN brokers will charge commission fees for individual transactions.
This can sometimes cost more than what you are paying in spreads. However, there are a number of key advantages to ECN brokers that extend beyond mere cost savings, which we will discuss in greater detail down below.
Why Is ECN so Popular?
There are a number of reasons why ECN brokers are immensely popular among certain types of traders. Many forex traders simply do not agree with the spread system, as this allows the market makers to set their own prices independent of anyone else. This can be seen by some as non-competitive pricing that puts individual traders at a disadvantage.
In addition, spreads are rarely transparent, meaning that it is not always clear why you are being forced to accommodate certain spreads. Meanwhile, ECNs allow for a completely competitive and transparent pricing system, as buy and sell prices are essentially determined by an auction, in which the most competitive prices win out.
Furthermore, an ECN broker will never take a position against an individual trader – something that is a routine practice among market marker brokers. ECN brokers also allow you to avoid some of the more irritating aspects of market maker brokers, such as costly re-quotes and delays to liquidity. These are some of the top reasons why ECN brokers have become so popular in recent years.
Pros of ECN
There are many pros to choosing ECN brokers over conventional market maker brokers. Most importantly, ECNs provide you with direct market access to all other participants and liquidity providers without an opaque middleman facilitating trades on your behalf. This means that you automatically gain access to the most competitive pricing on the market, substantially boosting your bottom line in the right conditions.
In addition, ECNs are much more transparent than traditional brokers, as you have access to the exact market prices of forex on your feed and can see historical pricing, so you know you are not being ripped off as price manipulation is more difficult.
All trades with ECN brokers are completely anonymous, as this allows all participants to deal with neutral prices that reflect actual market conditions. So, if you’re a trader that is concerned with data privacy, then you should consider using ECN brokers. Finally, ECNs mean instant trades. As soon as you buy or sell, the trade is done. There is no lengthy facilitation process and no chance of you being slapped with a re-quote further down the line.
Cons of ECN
That being said, there are some downsides to ECNs that you should be aware of. The most obvious disadvantage is the price tag that is attached to ECNs. All brokers will charge a commission to any trader that wants access to an ECN, as ECNs are premium services that tend to use sophisticated, costly technology.
It is absolutely essential that traders weigh up the costs and benefits of ECN trading to ensure that they will not end up paying more than they would with spreads. There is a fixed commission for every single transaction. This is how ECNs make their profit.
In addition, ECNs can be challenging for beginner traders to use. There are so many participants and factors at play in the network that prices for assets are constantly fluctuating. This can make it difficult to put a strategy in place and it can be very difficult to even put in a stop-loss with an ECN. This is why they should only be used once you have gotten the hang of how they work.
Which Type of Trader Should Use ECN?
ECNs have something to offer every type of trader. They offer transparent, competitive pricing, as well as instant trades on virtually all forex markets. If you are a day trader that aims to profit from incremental price fluctuations throughout the day, this can be invaluable.
In addition, it is also crucial to note that ECNs offer 24/7 market access, regardless of whether or not a particular market is open. This makes ECN brokers ideal for forex traders that want to trade currencies that are typically active during inconvenient market hours.
For example, you may want to trade JPY/AUD from the UK but do not want to stay up past midnight waiting for trading in Tokyo to start. You can use an ECN to start trading at any time, with relatively few liquidity constraints.
However, we do recommend that only seasoned forex traders use ECNs. If you are completely new to trading, ECNs can be overwhelming. Things move very fast on the ECN market and it can all too easy to be overtaken by events.
Best ECN Brokers
If you are ready to take advantage of ECNs and incorporate them into your trading strategy, you need a trusted and licensed US broker. For the best brokers that offer full ECN access to all account holders, we have got you covered. Make sure to consult our detailed forex broker review pages to find the right ones for you.
Make Informed Trading Decisions
Whether you want to enjoy direct market access with ECNs or just want to learn more about how brokers make their money, we are here to help. On our site, you can find detailed information and guides on everything you need to know about forex trading in 2021 and beyond.
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Axel
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