What is ECN and how to find a True ECN Broker

ecn broker

An ECN broker is a forex financial expert that uses electronic communications networks (ECNs) to give clients direct access to other participants in currency markets. Because an ECN broker consolidates price quotations from several market participants, it can generally offer its clients tighter bid/ask spreads than would be otherwise available to them.

With a true ECN Broker, the spread starts from 0.0 pips, NOT from 0.1 pips or higher, as with ECN technology, the bid/ask spread should not be limited anyhow! 

This spread is essentially the difference between the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept, without any kind of mark-up.

Basics of an ECN Broker

ECN brokers are non-dealing desk brokers or NDD brokers, meaning that they do not pass on order flow to market makers. Instead, they match participants in a trade electronically and pass the orders to liquidity providers.

Since an ECN broker only matches trades between market participants, it cannot trade against the client, an allegation often directed against some unscrupulous retail forex brokers. Because ECN spreads are much narrower than those used by everyday brokers, ECN brokers charge clients a fixed commission per transaction.

An ECN broker facilitates trades for interested investors across the ECN. Working with brokers of this nature often results in lower fees as well as additional forex trading time availability because of how the ECN functions.

Understanding the ECN

The ECN provides an electronic system for buyers and sellers to come together for the purpose of executing trades. It does this by providing access to information regarding orders being entered, and by facilitating the execution of these orders. The network is designed to match buy and sell orders currently present in the exchange. When specific order information is not available, it provides prices reflecting the highest bid and lowest ask listed on the open market.

The system allows price makers (liquidity providers) to send executable streaming prices (ESPs also known as Bids and Offers) to the market, constructing a virtual order book in much the same fashion as a stock exchange would. 

Benefits of an ECN Account

The use of the ECN allows investors a way to trade outside traditional forex trading hours, providing a mechanism for those who either can’t be actively involved during normal market times or who prefer the flexibility offered by wider availability. It also avoids the wider spreads that are common when using a traditional broker and provides overall lower commissions and fees. For those concerned about privacy, the ECN can provide a level of anonymity to those who desire it. This can be particularly attractive to investors interested in making larger transactions.

Price feed transparency is also a byproduct that many consider a benefit because of how the information is transmitted. All ECN brokers have access to the exact same feed and trade at the precise price that is provided. A certain amount of price history is also readily available, allowing for easier analysis of particular trends within the marketplace. This helps limit price manipulation, as current and past information is readily available to all, making it more difficult to act unscrupulously. Additionally, no trader has a particular built-in advantage over the other, as they all have equal access to the information.

To sum the main advantages of an ECN Account:

  • Less slippage amount
  • Faster execution
  • Tighter spreads
  • No interruption or manipulation to orders or market prices

Disadvantages of an ECN Account

One of the biggest drawbacks to using an ECN is the price to pay for using it. Typically the fees and commissions for using an ECN are higher as compared to non-ECN systems. Per-trade-based commissions can be costly and can affect a trader's bottom line and her profitability.

With AM Broker you can benefit from an exclusive, limited offer: ECN account with ZERO spread starting from as low as 500$ minimum deposits

STP vs ECN Brokers

Unlike an ECN Broker, an STP Broker is a type of a Market Making broker. This broker, most of the time, displays its own quotes (which are correlated to the actual inter-banking quotes).

Now here is the real complexity: sometimes this broker routes your orders to the market (acts as an STP broker) but sometimes it doesn’t (acts as a Market Maker).

For instance, successful traders or successful trading algorithms will be automatically routed to the market while small or losing clients will not. This way the broker profits twice: once by clients’ losses and another by not losing money to successful traders (of course this never works 100% but it does most of the time).

This way the STP broker’s commission comes from two sources: unsuccessful clients’ losses and commission arbitrage on routed orders – when you trade at 2 pips with this broker for example, it routes your orders to another broker or the inter-banking market thus making 1 forex pip without assuming any risk.

This model is also responsible for all the re-quotes and order rejections. When you open a large order the broker routes it to the market, but the prices there might have already changed (the market does move very fast sometimes) – so the broker is faced with two options: either rejecting the order asking for you to adjust prices or completing the order by taking the risk that it might end up a successful trade meaning the broker will have to pay you from its pockets (Nostro).

So how do you as a trader distinguish between an MM, STP or ECN broker?

Well, it’s easy to recognize an ECN broker: the minimum capital requirements and the ability to see not only the bid and ask prices but also the amounts on either side of the price (Depth Levels) is the most notable ECN feature.

Can you tell the difference between MM and STP? Probably not.

It’s very hard to distinguish between these two and most of the time the brokers use a hybrid model anyway. Most of US and UK regulated brokers will not ‘trade against you’ in the way that will make you lose money, not because they are moral but because this might cause problems with their license.

How to find a TRUE ECN Broker?

Bad practices of brokers that may pretend they are ECN brokers, but in reality, they do not offer a True ECN account:

  • They have a dealing desk. You want an NDD broker (no dealing desk).
  • They offer a minimum stop loss. For example, you can’t place it within 5 pips. Why would they need to control you?
  • They hunt your stop loss orders. They manipulate the price so that you will be stopped out.
  • If you are trading with a Market maker, you are not even trading in the market! You never reach it, you only trade with the broker! So if your broker is on the other side of your trades, you can bet that he gains on your losses, and also lose when you are winning. That’s some obvious conflict of interest right there.
  • They don’t allow scalping techniques or other trading strategies. This is crazy, why would they not want you to trade often? Because it’s harder to control you!
  • They don’t provide spreads from 0.0 pips. This is an obvious fact that you are overpaying.
  • They have a conflict of interest with you due to their partnership with a liquidity provider.
  • One of their liquidity providers belongs to the same company as your broker.
  • They route your order to someone special or sells it, leaving you with additional slippage.
  • They don’t let you benefit from positive slippage but only on the negative, taking your slippage profit as their own.
  • They manipulate spreads, often to stop you out.
  • They change margin requirements on weekends, forcing you to change your positions.
  • They do re-quotes.
  • They apply a high markup on swaps.

Now you might think, where in the world will I find a TRUE ECN broker?

Welcome to AM Broker 

Open an AM Broker ECN Account and trade with ZERO spread and fast-lightening execution. If you don't find your trades more successful than before, just withdraw your funds. No questions asked!

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Categories:  Education