The forex market offers many different broker models, including ECN, STP, and market makers. One of the more popular styles is ECN, which stands for Electronic Communication Network. This method is widely approved by traders because it cuts out the middleman by directly connecting traders to top-tier liquidity providers, including options like banks, brokerages, and other traders across the globe. Several perks and a general sense of transparency cause many traders to find ECN trading superior when compared to other options.
How Does ECN Trading Work? Does it Have Advantages?
Traders have the Financial Information Exchange Protocol (FIX) to thank for powering ECN trading. The international electronic communications protocol services real-time information exchanging between those that are trading the market, including individual traders and larger institutions. Traders can take part in ECN trading during market hours and after hours. ECN trading also allows traders to remain anonymous so that neutral prices cannot be slanted against them through certain market tactics.
One of the main advantages to FIX is its ability to provide clients with tighter bid/ask spreads than what would be offered through other services. The protocol keeps latency as low as possible to support faster trade executions while matching purchase and sell prices through an automated system. The automated system eliminates the need for a middleman, connects traders with the best liquidity providers, automatically matches and executes orders instantaneously, allows passive order matching, and provides prices that match the lowest ask price and highest bid price on the market in the case that specific order information is unobtainable. Here are the benefits of ECN trading in a nutshell:
- Maximum price transparency
- Revolutionary trading technology through the FIX protocol, which matches traders with the best liquidity providers
- Instant trade execution with no delays (ideal for using EAs or algorithmic trading)
- Better prices and tighter spreads than those offered by STP or market makers
- No re-quotes and more limited slippage thanks to the absence of an NDD (No Dealing Desk)
- Brokers never trade against their clients
As you can see, there are many advantages associated with ECN trading. Brokers do not trade against their clients, traders have access to lightning-fast automatic execution which is the best option for those using services like Expert Advisors, and prices and spreads are lower and more transparent. This trading style is also highly beneficial to scalpers because they thrive in conditions that are more volatile.
What is an ECN Broker?
Your ECN broker delivers your orders to liquidity providers, while primarily dealing with interbank and large financial institutions. This type of broker does not trade against their clients and therefore offers tighter spreads with fixed commission charges on each transaction. The anonymous factor involved with ECN trading eliminates any possibility for bias while ensuring that traders will have access to neutral prices that are not skewed against them based on market tactics.
It’s important to find a broker with a platform that offers good access to market data. Different traders will have different needs when it comes to charting features and technical analysis tools, so be sure to write out your wish list and check that any potential contender is offering everything you need. Accessibility is one factor to consider, as you might like to trade through your computer’s browser or on an app. Consider the interface and navigation as well. Try to avoid anything that is overly simple with zero features or overly complicated and confusing. Overall, you’ll just want to find a platform that you can navigate easily enough without skipping out on any important features that you’ll miss.
Choosing an ECN Broker: What to Look For
If you decide to trade through an ECN broker, they’ll need to pass the test first. Be sure to check for the following:
- Floating and variable spreads
- Check that order execution is priced fairly and seamless
- Commissions fees should be zero or fixed
- A trading platform that fits your individual needs
- No mention of a dealing desk
- No negative slippage
You’ll want to scour the broker’s website to check for all of the above, however, the best way to really make sure you’re dealing with a true ECN broker would be to check out their demo account. This should give you enough insight to know whether the broker’s claims are true and can give you peace of mind before you open a real account through your chosen broker.