What is an Electronic Communication Network (ECN) Broker?
Here we analyse whether it is convenient to trade Forex with an ECN broker, the advantages and the disadvantages and the difference between an ECN Broker and a market maker.
What are the ECN Broker? It should operate on the forex market by relying on an ECN Broker?
Let’s see in detail the advantages and disadvantages of an ECN Broker, what is it, what are the differences from a Broker “market maker” and if you really should rely on an ECN Broker.
ECN broker: What is it?
An ECN (Electronic Communication Network by) broker is a financial broker in the Forex market that connects it’s clients and trades directly to the pool of liquidity providers, by doing so its clients are able to take the best price available on the various liquidity provider, investing directly in the market. The Forex market is an over the counter market made up from the aggregation of prices of the various big banks or market makers .
Advantage:
An advantage of an ECN broker is that they are able to give you the best spread, as they aggregate all prices and serve their clients the best available price in the market at that give time. With a market maker you might pay slightly higher prices, as they would work on one forex feed.
The ECN brokers normally will will charge a commission on top of the spread. In high liquid markets you can also get a 0 spread trade by aggregating the bid and ask of two different liquidity providers. Disadvantage:
In a fast market or a market that is extremely volatile, there might not be enough volume to honour your trade, the price might move too fast and your opportunity gets rejected. On the other hand a Market maker, can honour the price as you are trading on the market maker’s system.
How does a ECN Broker work
The ECN broker aggregates prices from multiple liquidity providers , such as banks and market makers and makes these prices available to it’s clients, allowing him to see the the bid / ask quotes on the best trading platforms. These spreads will change in price as the market is more or less liquid.
The more liquid the market the smaller the spread will be, the less liquid the market the wider the spread.
On the other hand market makers with fixed spreads will offer the same spread at all times, when the markets are liquid or il-liquid, in hours or out of hours. The spreads can vary from broker to broker, from location to location.
As mentioned earlier, during periods of very active trading, you can get sppreads as low as 0 pips, by aggregating the bid and ask of the various liquidity providers on the most liquid crosses as EUR/USD, USD/JPY, GBP/USD and USD/CHF.
The Electronic Communication Network (ECN) Broker earns on fixed commissions it charges its customers for each Forex trade. A true ECN broker does not change the prices.
ECN broker: the differences with Market Maker
Accounts offered by Forex Forex Brokers offer two main type of accounts (often the same broker can offer both types of accounts, according to the traders preference): Market Maker Forex trading account and ECN Forex trading account.
Some brokers offer accounts in both operating modes to suit a range of guests.
Let us now see the differences between the two types of account:
Broker Market Maker – is the broker to “create the market.” In fact, the trades take place between parties operating with the same broker creating a kind of micro-market Forex parallel to the global Forex market.
More info: The advantages and disadvantages of the Market Maker broker.
ECN brokers – the broker is simply her broker job, or takes the customer’s order and tries to match it on the market, running it if possible.
This mode of operation, certainly more secure and professional, has advantages and disadvantages.
Benefits of accounts with ECN Broker
As we said earlier, having an Electronic Communication Network (ECN) account has the advantage of having tight spreads. Traders will get the same spreads as the interbank market, which are very low, or (in some cases) non-existent. But there are also fixed trading commissions that a market maker does not make you pay, as he puts them into the spread.
Direct market access: In an ECN account the counterparty is the forex market “official”, hence the distortions possible with a Market Maker should not show up with an ECN.
Accuracy of quotations: Quotations in ECN field are generally more precise (fractions of pips).
Speed of execution: Running through an ECN broker is virtually instantaneous.
Scalping Free: There is not any restriction with respect to the implemented trading style.
Disadvantages of accounts with an ECN broker
Complexity and weight of the commissions: in addition to the spread, if present, an ECN also applies fixed fees related to trading volumes.
price jump: if you miss a counterparty in the market for our order (including the stop loss), such as during a burst of volatility, there is a risk that the order remains unexecuted. This perspective can be very heavy if you are not sufficiently capitalized or simply unprepared.
Spread variables: in particular the spreads market conditions can vary greatly. This also happens with some MM.
increased minimum capital: basically the minimum deposit with an ECN broker is higher than with a market maker, however, the trend of the ECN is to lower these limits in order to attract more customers.
lower levers: as above, the situation is worst for those with small capitals that with a MM, but the offers levers are gradually increasing also with the ECN.