Foreign exchange (Forex) is a decentralized, global, over-the-counter market (OTC) market where investors, traders, and other institutions buy and sell fiat currencies. It’s the largest and most liquid financial market, with an estimated daily turnover of over US $5 trillion. The currencies are traded 24/7 from Monday to Friday
Since Forex is a decentralized market, with no physical location to trade the currencies, the trading usually occurs through brokers. A broker is a company that provides forex traders with a special platform which connects them to the interbank market where the trading occurs. Your forex broker acts like a business partner and so as a trader, you must be very careful when choosing your broker. One of the most important things to consider when selecting the best FX broker is exactly what type of broker you are dealing with. All FX brokers aren’t the same and it’s worth considering the two main, and completely different business models that brokerage companies use – ECN and Market Maker.
In this article, we are going to discuss what is an ECN forex broker, how to identify one and the benefits of working with such type of broker.
What Exactly is an ECN Forex Broker ?
ECN, which translates to Electronic Communication Network, is been considered by experts as the way of the future for the Forex Market. It can be described as a bridge that connects smaller market participants to its liquidity providers via an ECN Broker. This connection is done using highly advanced technology setup known as FIX ( Financial Information Exchange) Protocol. The broker first obtains liquidity from big liquidity providers like banks and then makes it available to its traders for trading. Once the clients place their orders, the broker delivers them to its liquidity providers for execution. The ECN software then automatically matches and execute the requested orders at the best available prices. The unique forex trading model makes sure that ECN brokers don’t trade against their clients and the clients enjoy faster execution of their orders. Also, since the true ECN brokers gather their price quotations from several liquidity providers, they are able to offer their clients much tighter bid/ask spreads than those offered by market makers. ECN brokers make a profit by charging their clients a fixed and transparent commission on every transaction made. So, the higher the trading volume, the more the profit they generate.
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How to Identify a True ECN Broker
Due to the lucrative nature of forex trading, the market attracts all forms of participants from con artists to genuine forex brokers. You will find some brokers that masquerade as true ECN brokers, but actually they are market makers. As such, it’s imperative to know how to differentiate the real FX brokers from the fake ones. The following are some helpful tips to guide you;
1. A true ECN broker should mention in their client agreement or terms of service that they are a true ECN broker. It’s a must for any brokerage company claiming to be a true ECN FX broker to disclose this info to their clients. Hiding this information suggests that the broker may just be pretending to be an ECN broker.
2. Check the spreads quoted by the brokerage company. If the broker is offering its clients’ fixed spreads, then that may be a sign that it’s not a true ECN forex broker. ECN brokers usually provide variable and tight spreads to their traders.
3. For a true ECN broker, slippages can either be positive or negative. Monitor the broker to see whether they only give negative slippages to their client. If that’s the case, then chances are the broker isn’t a true ECN broker.
3. True ECN brokers don’t have restrictions on order placement. So if your broker is rejecting an order of, let’s say, more than 5 standard lots, then chances are it may be a market maker. Furthermore, a non-ECN broker will also restrict its traders from scalping which means that if you are a day-trader, you will have limited opportunities to generate profits.
4. Check if your broker is a dealing or non-dealing desk. True ECN brokers are completely non-dealing desk brokers whereas market makers are typically dealing desk brokers (they trade against their clients)
5. Most True ECN brokers will not promise you big discounts and others when opening an account. Like we mentioned before, they generate their revenue by charging a commission for every transaction, whether you lose or win your trades.
6. Finally, a true ECN broker usually updates and displays its prices every minute as they are coming live from the liquidity providers.
Benefits of Working With a True ECN Broker
1. Less Interference
One of the reasons why most traders want to work with a true ECN forex broker is less interference of their trading activities. This is because, unlike market makers, true ECN forex brokers don’t operate on a dealing desk. This means they have more flexibility than market makers when it comes to dealing with their clients’ orders. This flexibility allows them to fill out their clients’ orders without interfering with them, unlike market makers who tend to manipulate the prices in an attempt to make more profit for their own.
Market makers usually have ulterior motives for doing trading in certain ways, and they use them for their own gain.
2. True ECN Forex Brokers Allow Their clients to Trade on Market Prices
Prices in the Forex market are always changing and as a trader, you would want to directly work with other market participants. True ECN brokers use Electronic Communications Network to give their clients direct market access meaning that they can trade on actual pricing of various currencies.
Brokers who use market maker model, on the other hand, will determine the prices themselves in order to get a cut of the profit.
While you’ll find most market makers claiming to offer attractive spreads and fast trade execution, ECN forex brokers still have the upper hand since they make use of sophisticated technology to link clients to liquidity providers ensuring there are no re-quotes necessary and clients can get the most value out of their money.
3. True ECN Brokers Are Generally More Reliable and Trustworthy
When it comes to financial investments, most people would want to entrust their hard-earned money to brokerage companies that are reliable and trustworthy in order to get the most out of their investment. The following are some reasons why true ECN forex brokers are more reliable and trustworthy than other types of brokers;
- They offer their clients the best available market prices and tighter spreads. They also utilize advanced technology to ensure fast and seamless trade execution even after hours.
- Most of ECN brokers make a profit by charging a fixed commission instead of using mark-ups. So, clients are able to calculate their expenditure accurately.
- ECN brokers provide their clients with direct access to the global market so they enjoy actual pricing of financial instruments, unlike other types of brokers that determine the price themselves.
- Lastly, the unique ECN trading model ensures the brokers will never trade against their clients, which makes them one of the most trader-friendly brokers to work with.
Because true ECN brokers are more honest and reliable, there is a higher demand for them.
4. ECN Broker Offers Various Options for Their Traders
When it comes to finances and Investment, most people want to go for variety. True ECN forex brokers aren’t just limited to one type of investor. To accommodate all kinds of investors, most companies are now offering an array of different true ECN brokers. Some of them may exclusively serve institutional traders, others retail traders, and others even a combination of both.
5. Traders Working With ECN Brokers Enjoy Complete Privacy and anonymity
Traders that work with a true ECN broker enjoy a higher degree of privacy and anonymity than those working with market makers. The reason for this is ECN brokers only acts as middlemen linking investors to the interbank and allowing them to only deal with neutral prices that reflect the real market conditions. This means that the brokers will never manipulate the market prices based on whatever tactics, strategies or current positions their clients may be holding.
In fact, most ECN FX brokers are not aware of what strategy you’re trying using as their work is to just deliver your orders for execution.
6. Offers Instant Trading
Some true ECN brokers continue working after the Forex market closes, while still providing to their clients the necessary products and services. These companies investing a lot of money in updating their software technologies to making trading easier for their clients. In fact, most of their trading sessions are actually live, also known as instant trading. This means that once a trade is dealt with, it’s final and confirmed without any interference or requotes. This ensures that investors can keep track of their profits.
7. Variable Spreads
As previously mentioned, one way of identifying a true ECN broker is by checking its offered spreads. Unlike market makers that offer fixed spreads, True ECN brokers usually offer variable spreads since they do not control the bid/offer spread meaning that they cannot offer the same bid/offer spread always. True ECN brokers also offer tighter spreads than market makers.
You can reap the above benefits whether you are a beginner or a pro in forex trading. A true ECN account allows you to practice your trading strategies and techniques without interference or the possibility of being double crossed. You’ll also enjoy direct access to the market and deal with real market prices. However, before settling for a true ECN broker, you should also consider their cons such as high commission fees and large deposit requirement and see whether these will affect your trading or not.