Is an ECN Broker the Right Choice for You? All You Need to Know to Make an Informed Decision
If you’d prefer a Forex broker who is always on your side, with no fear of any kind of conflict of interest, an ECN Forex broker is definitely going to be the right choice. Sounds uncomplicated when you look at it like that, but choosing the right type of Forex broker is actually rather more convoluted. In order for you to have all the details to make an informed decision, we’ve decided to look at ECN brokers in a little more detail.
What does ECN stand for?
ECN stands for Electronic Communication Network, and is a fast-expanding way for traders to do their business. The network enables trading of financial products to take place outside of traditional exchanges. And it isn’t just a way of trading foreign currencies, although this is its primary purpose alongside the trading of shares. Orders entered by market makers are distributed to third parties, and these orders can be executed in part of in full. You may be thinking it is a relatively recent way of trading, but the first ECN was created in 1969, although Internet currency trading didn’t get onboard until 1999.
What do ECN Forex brokers do?
Forex ECN brokers provide a place where market makers and traders can place competing bids against each other. In effect, an ECN broker acts as a kind of bridge between small market participants and Tier-1 liquidity providers. The link is possible because of some very sophisticated technology known as FIX Protocol (Financial Exchange Protocol). On one side of the link is an ECN Forex broker that obtains liquidity from Tier-1 liquidity providers (major banks), and makes it accessible for trading to its clients. On the other side, Forex ECN brokers deliver their clients’ orders to the liquidity providers for execution. ECN Forex brokers make their money by charging a commission on each transaction; so the bigger their clients’ trading volume, the more money they get to make.
What are the advantages of using the best ECN brokers?
Many of today’s traders consider ECN Forex brokers the best way to trade in the Forex markets. So let’s discuss what it is that makes trading with the best ECN brokers such a popular pastime:
- Complete anonymity – This is possibly the primary reason for many traders choosing to use the services of an ECN broker. There are so many players in the Forex market that it is of the utmost importance to be able to enjoy privacy and security. This is possible when trading with an ECN Forex broker, because they only act as the middle man, and aren’t market makers. A trader who chooses to trade on an ECN network can rest assured that the trades they make are indistinguishable from all the others, and can’t be traced by anyone else in the market.
- Improved execution of trades – When choosing to trade with the help of an ECN broker, traders get to enjoy improved execution of trades, as they aren’t dealing directly with the broker, but using their network to place their orders. The Forex ECN broker isn’t responsible for executing the orders – merely for matching them to other market participants. This leads to far greater speed and efficiency, as well as there being no conflict of interest on the part of the ECN broker.
- Continuous trade – When trading via an ECN account there is no need to worry about a break in trade; and the same applies during news and events. Continuous trading also brings the benefit of increasing price volatility, which is a great opportunity for more profitable trades.
- Variable spreads – An ECN Forex broker has no control over the bid/ask spread, so is unable to provide the same spread all the time. An ECN FX broker therefore usually offers variable spreads, which some traders consider an advantage. Traders are given direct access to market prices, which fluctuate according to supply and demand, volatility and other conditions. This means they get to trade on tight bid/offer spreads, sometimes 1 pip and lower, on all majors in normal market conditions.
As you might expect there are also some disadvantages, including the following:
- High cost of trading – This is possibly the biggest downside of ECN Forex trading. Essentially ECN brokers make their money by charging a commission on every trade. If you happen to be a high-volume trader, it could work out to be very expensive.
- A tendency to crop in the market – With ECN trading there is a higher chance of traders trying to influence the market with high-volume trades.
We should also mention that there are a number of brokers who claim to be ECN brokers when they are anything but. So how can a trader tell whether the ECN broker is the genuine thing?
Best Forex Brokers with ECN Forex Trading
How to identify a bona fide ECN broker
There are a couple of terms bandied around in relation to ECN brokers, which makes the whole issue of picking one a little more complicated:
- True ECN – This is a broker that offers a transparent platform where all market participants, including banks, organisations and retail traders, can compete against each other by sending in bids and offers. In this way, traders are able to get the best possible deal at any specified time.
- ECN by association – This type of broker acts as a Level-2 broker that links traders and real marketplace, or true ECN, brokers. They usually have their own in-house platform, and can manipulate trades to their own advantage.
Identifying a true ECN broker is really rather easy. Just look for the following:
- A true ECN broker always has variable spreads.
- A true ECN broker has no dealing desk, and you can find out whether this is the case by opening a demo account and a small real account and watching the pip difference, and how much prices vary during news events.
- A true ECN Forex broker will have no restriction in setting the stop loss or take profit distance.
- A true ECN broker allows scalpers and day traders.
- Slippage is a normal occurrence in a true ECN market, so if your broker is only giving you negative slippage it’s not a true ECN broker.
- A true Forex ECN broker will allow you to place any amount of trades.
- A true ECN Forex broker will display pricing updates as and when the prices are coming live from the market.
Now you should have an understanding of what an ECN broker does, and how you can differentiate between a real one and a fake. You should also be able to appreciate the pros and the cons of using an ECN broker. It’s time now to concentrate on the difference between STP and ECN, as you will often find the two together.
What is the difference between STP and ECN?
You will find many people talking about STP and ECN brokers as if they are one and the same. Things couldn’t be further from the truth, although there is one similarity: Both types of broker operate without a dealing desk – but that is where the similarity ends. Many traders prefer to deal with brokerage firms that have no dealing desk, because it means the broker won’t have an opportunity to interfere with a trader’s order. The trade is simply placed with a counterparty, rather than the broker acting as the counterparty in the trade.
STP stands for Straight-Through Processing.
What happens here is that a trader places an order with an STP broker, and the order is passed onto one of the broker’s liquidity providers. Each STP broker will have its own liquidity providers, which could include other brokers, banks, or other liquidity providers. The liquidity providers are the counterparty to the trader; not the broker, which is the case with a market maker. An STP broker makes money in one of two ways: It can mark up the spread, or charge the trader a commission. It is therefore in the best interests of the broker to encourage the trade to make money, and consequently make more trades. This is one of the reasons STP brokers are seen to avoid a common problem with a broker that uses the dealing desk model.
ECN stands for Electronic Communication Network
In the same way as an STP broker, an ECN Forex broker sends some of its trades to a variety of liquidity providers, but it may also send some of those orders to other users of the network. Let’s give you an example of how this might work: Say a trader wants to go long. An ECN broker can match the order with another trader who wants to go short – and this can also work in the opposite direction. It also means that traders using an ECN broker can benefit from zero-pip spreads, because ECN forex brokers make their money by charging commission on top of the spread. The tight spreads that are often offered by ECN Forex brokers is one of the main reasons they are preferred; but it is important to factor in the costs of that extra commission.
So which is better? STP or ECN?
The general consensus is that Forex ECN brokers are better than STP, as many offer better value, even when the commission charges are figured into the equation. We should point out, however, that many of the brokers advertising themselves as ECN brokers are really only glorified STP brokers. A true ECN broker will give traders information relating to the depth of market, thereby allowing them to see the liquidity available on the network, across a range of different prices. We’re not saying there is anything wrong with using the services of an STP broker, as there are many that offer a more than adequate level of service. However, you should always be completely aware of who you are dealing with.
If you’ve decided that an ECN broker is the right type for you, it’s time to consider how you can find the best one.
Tips on choosing the best ECN broker
There are thousands of brokers to choose from, and new ones are entering the Forex market every day, which doesn’t make it all that easy, because not all brokers are cut from the same cloth. In order to increase your chances of being a successful and profitable trader, you need to pick an ECN Forex broker that is safe, and best fits your needs.
There are a number of factors to consider before you open an account and deposit your hard-earned cash into a trading account:
Ensure the Forex ECN broker is regulated.
This is possibly the most important factor to consider when picking a Forex broker, whatever type you have chosen to work with. A regulated broker will have sufficient capital to cover any trading losses. Your funds will also be kept in segregated and secure accounts, and you can be sure that dealing practices will be fair and trades executed at prevailing market prices. You can check out the licence of any potential broker by visiting the regulatory body’s website. We will also mention this vital information in our broker reviews, after checking out the validity of any claims. Forex trading is regulated in most developed countries, but the standards can vary from country to country, and if a broker operates in more than one country they can be licensed and registered by more than one regulator. One of the better-known regulators is the FCA in the UK, but there is also CySEC in Cyprus and BaFIN in Germany. In the US, Forex trading is overseen by the NFA and CFTC, who impose very strict standards.
Security of personal data
Speedy trade execution
As you’ve chosen to pick an ECN broker, you can be pretty certain the trade execution is going to as swift as possible. As we’ve already mentioned, a true ECN broker allows you to see the best prices offered, and also the buy and sell orders of other network participants.
Look for a good range of tradeable products.
Gone are the days when Forex brokers only offered currency pairs. The best ECN brokers will also give you access to other capital markets via one Forex account. The world of online trading gets bigger by the day, which is only going to add to the possibilities of bigger and better profits. Nowadays, the best Forex brokers also offer opportunities to trade not just major and minor currency pairs, but also exotics, commodities, precious metals, single stocks, stock indices, bonds, bitcoin, ETFs, and trade currency and index options.
Fees, spreads, and commissions can impact on your profits.
The most experienced traders appreciate that the cost of trading can have a significant impact on profits. A pip or two difference might not seem a lot, but it can be compounded over time, particularly for high-volume traders. Remember also that many of the low-cost brokers are sorely lacking in frills. In the world of Forex trading, as well as in the world in general, you really do get what you pay for. The best ECN broker may cost a little more than the average Joe, but will typically offer a much higher level of service and include a number of useful extras such as research and market analysis, training materials, customer service and support 24 hours a day, trading tools, and a user-friendly trading platform.
It’s also important not to forget that costs aren’t just limited to spreads and commission. There may also be charges for deposits, withdrawals, wire transfers, credit cards, and when an account becomes inactive or is closed.
There are a number of other factors you should consider, including the following:
- Trading platform
- Access to social trading
- Account types
- Trading style
- Customer service
- Educational material
- Trading tools.
So there you have it all in a nutshell: everything you need to know if you’re considering trading with an ECN Forex broker. You are now in a much better position to make an informed decision, and if you follow our tips and hints you’ll be well on the way to finding the perfect ECN broker to suit your preferences, style of trading, bank balance and expectations. Don’t forget to keep revisiting our site, as we’ll be sharing some of the most honest and up-to-date reviews you can find. We’ll be looking at a wide range of Forex brokers – not just ECN brokers, but STP and market makers too. We will also help you choose the best Forex strategy for you.