All About ECN Brokers – How They Work and Benefits

An ECN broker is the purest form of Forex dealer out there. No profit is made on spread difference. Instead they charge a commission. As such, it is in their own best interest for their clients to be winning, or they wouldn’t be able to charge a commission.

What is an ECN broker?

ECN stands for Electronic Communications Network. An ECN broker is a Forex financial expert who uses such a network to provide its clients direct access to other participants in the market. An ECN broker consolidates quotes from several participants, in order to offer tighter bid/ask spreads. It’s not just individuals who can take advantage. ECN brokers’ clients include banks, market traders as well as single traders. The broker provides a marketplace where these clients can trade against each other, sending bids and offers into the system. Interaction takes place inside the system and traders can get the best offer at that particular time.

What advantages will a Forex broker offer?

  • Complete anonymity – Trading activity with an ECN broker is completely anonymous. This means that traders can deal on neutral prices that reflect real market condition only. Neutral prices aren’t slanted against a trader’s direction based on strategies, current market positions or tactics.
  • Instant trades -Trading takes place instantly, via live streaming, the best final prices and immediate confirmations. As soon as a trade is dealt it is final and confirmed. There is no dealing desk to get in the way and no re-quotes.
  • Automated data – A trader’s personal trading model and risk management system can be connected to the broker’s data feed and matching engine, giving access to best bid and best prices, along with a range of other data.
  • Variable spreads – An ECN Forex broker always has variable spreads. This is because they can’t control bid/s like a dealer
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The downside of using an ECN Forex broker

There aren’t a large number of cons is you decide to trade in the Forex market with an ECN broker. There are only a few but these few are worth mentioning. ECN brokers charge a fixed commission fee for every transaction. This is their profit. However, it is likely to be way cheaper and certainly more transparent than costs involved in using a market maker. Market makers make their money through larger bid ask spreads and unfair prices. Calculating stops and targets can be rather challenging when done using an ECN broker platform. This is because the price is constantly moving and because of the variable spreads. There is also the possibility of slippage. Particularly when a session overlaps, because clients and various factors are influencing price ticks at the same time.
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Choosing the best ECN Forex broker

If you’re looking for solid and reliable trading conditions, and are a serious, long-term trader ECN brokers are definitely worth considering, because they never trade against their clients. However, great caution must be exercised, as many so called ECN brokers aren’t that at all/ There are a few questions to be asked, in order to determine whether a broker is honestly offering ECN trading:

  • Are the spreads fixed or variable? A true ECN broker will only offer floating or variable spreads.
  • Is there a dealing desk? Any mention of a dealing desk on the company’s website and you’ll know you’re not dealing with a true ECN broker. Opening a real and demo account will allow you to observe the difference in pips being offered during news reports. With a true ECN broker, there will be no difference.
  • Is there negative slippage? If the answer is yes, then you’re not looking at a true ECN broker.

Once you’ve found a bona fide ECN broker you have to ensure you pick the right one. With the names of two or three brokers you can compare trading conditions, regulation and spreads and pick the one that has everything you’re looking for. We’ll be providing you with some great ECN brokers to consider, as well as a number of other types of broker.

You should have a clear idea of the qualities you’d prefer as this will help you decide on the type of broker to open an account with. Trading with an ECN broker will bring fixed commission fees and tighter spreads. Whereas a market trader will take the opposite side of your trade.

Other factors to bear in mind are liquidity and trade execution. Ideally you’ll be looking for a broker that guarantees order execution that is seamless and instant, all at a fair price.

Related topic

The best course of action is to open an account with an ECN broker and a market maker and test the differences for yourself, in real time, but without risking any money. First hand experience is worth its weight in gold.

Once you’ve decided on the broker of your choice and are prepared to risk your own hard earned money read the small print very carefully. Don’t be tempted to tick the box for agreeing with the terms and conditions without reading and understanding them first. Each individual broker will have its own set of rules, services and prices.