ECN Trading Explained
The currency marketplace is open to finance-savvy individuals on different continents. Access is obtained through brokers that register accounts and supply the necessary software. However, not all brokers are the same. Aside from checking the legal status of a company, pay attention to its nature. Here, classification makes a world of difference.
Market makers and ECN brokers both offer access to the immense market where trillions of US dollars circulate daily. Based on value fluctuations and differences between Ask and Bid prices, you may derive a profit from a carefully timed position.
Trading with any broker could bring you profit or loss. However, the methods for setting prices are drastically different. Interestingly, market makers are not always interested in their clients’ successes. Here is why.
What is an ECN Broker?
An ECN broker is a type of foreign exchange broker that matches buy and sell orders in the currency exchange trading market by using an Electronic Communications Network (ECN). The ECN is basically a computerized trading system that matches orders between buyers and sellers in the forex market.
ECN brokers insure that transactions on electronic communication networks go smoothly (ECNs).
These brokers help their clients get direct access to stock or currency markets on ECNs that they wouldn’t have otherwise.
ECN systems are more expensive than traditional exchanges, but they are open and have a lot of liquidity.
When investors use an ECN, they can trade outside of normal trading hours. This is useful for those who can’t be active during normal market hours or who prefer the flexibility that comes with a wider range of availability. It also avoids the wider spreads that are common when using a traditional broker and gives overall lower commissions and fees.
For people who care about their privacy, the ECN can give them some anonymity if they want it. This can be especially appealing for investors who want to make bigger deals.
ECN brokers don’t have a trading desk, so they don’t send order flow to market makers. Instead, they match up the people who want to trade electronically and send the orders to the people who have the money to pay for them.
An ECN broker makes it easy for investors who want to trade on the ECN to do so. Because of how the ECN works, working with these kinds of brokers often results in lower fees and more trading time.
Benefits of trading with an ECN Broker
ECN brokers offer the following benefits to forex traders:
Lower spreads on the bid and ask prices
There is always a spread between the best buy and sell prices when buying or selling financial assets. The best price to sell (the “ask”) must be paid by the buyer, and the best price to buy (the “bid”) must be taken by the seller.
Because an ECN matches trader orders with the best buy and sell prices from all forex market participants right away, bid-ask spreads tend to be smaller.
So, traders can enter or leave the market at better prices than they would be able to get through a broker with a dealing desk. Dealing desk brokers usually have bigger bid-ask spreads because they keep some of the spread for themselves.
ECNs make it possible for clients or investors to trade on market exchanges outside of the normal trading hours.
Trades happen right away, and the spreads are much smaller than they used to be. There are many different liquidity providers competing for orders to trade. It gives them a reason to try to offer the lowest rates possible to beat the competition and get traders.
Flat rate commission
Instead of making money from the bid-ask spread, ECN brokers usually charge a flat commission rate on each trade.
Drawbacks of ECN Trading
Electronic communications networks have some drawbacks.
One of the worst things about using an ECN is that you have to pay for it. Most of the time, using an ECN costs more in fees and commissions than using a system that doesn’t use an ECN.
Commissions based on each trade can be expensive and hurt a trader’s bottom line and ability to make money.
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The difference between an ECN Brokers vs Dealing Desk Brokers
Dealing desk brokers, on the other hand, either take the opposite side of the trade themselves (i.e., they sell to a client who places a buy order or buy from a client who places a sell order) or send the order to a market maker.
The Understanding of how Dealing Desk Brokers execute orders
Dealing Desk Brokers trade on the opposite side of their clients, they are essentially making investments that go against what their clients want.
Dealing Desk Brokers they send orders to a market maker, order execution will be slower, which could mean that customers’ orders will be filled at less favorable prices.
Market Maker vs ECN broker
As the first term suggests, this broker “makes the market”. This means the Bid and Ask values are determined by the company itself. The prices set by the provider are then displayed to clients on the trading platforms. All positions are opened and closed based on these indicators.
Another peculiarity is that profit for a client translates into a loss for the broker. This is because it is paid from the company’s funds. Client positions are not hedged with other providers of liquidity. These features distinguish market makers and highlight the downsides of their services.
So, are ECN brokers any better? These rely on interbank trading prices. The abbreviation stands for Electronic Communication Network. Clients gain direct access to other marketplace participants. Thanks to the nature of the system, traders of currencies find counterparties for their positions in a transparent environment.
Why You Should Trade with ECN Broker
The broker allows liquidity providers to compete in a single auction. It functions as an intermediary between buyers and sellers. This translates into better prices and trading conditions for a client. Overall, the system is more efficient and clear.
An ECN broker will link you with different market participants, but it does not set its own quotes. The source of its profit is the commission charged on every trade. Therefore, it profits when clients win or lose, rather than trading against them.
This eliminates the conflict of interest which is inevitable for market makers. ECN brokers receive commission regardless of your success or failure on the exchange. They are not tempted to manipulate their prices. Overall, their practices are more transparent and attractive.
How to Open ECN Account
As you can see, ECN brokers offer more reliable, fair, and clear trading conditions in general. They have no motivation to tweak their prices. They only function as intermediaries, and they receive a commission from any trade regardless of its outcome. Therefore, the choice is obvious.
When registering an account with an ECN broker, do some research to see if the company is licensed to operate in your region. Pay attention to the authorities that supervise its business. Account generation is usually fast and uncomplicated, but it may require certain data to verify your identity.
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Alexandra is a professional writer with an extensive background in the financial markets. Alexandra started out in the financial industry in 2011 and trades forex, stocks, and cryptocurrencies.
Alexandra also writes technical and fundamental market analyses. Alexandra also tests forex brokers’ trading platforms and crypto exchanges and writes forex broker reviews.