An ECN broker is referred to as a financial institution that acts as a middleman between a trader and the currency markets. An ECN broker gives its users access to the Forex markets by using an electronic communications network hence the name ECN.
This is made possible because an ECN broker deals on reduced price quotes from different market players, it provides a tighter bid/ ask price, spreads, and fees that can’t be quoted any other place at that cheap rate.
An ECN broker cannot trade between other market participants; they trade only with their clients. Their spreads are normally tighter than normal traditional brokers, but the difference is that they charge a fixed fee for each transaction carried out.
Additionally, the ECN makes it easier for its clients to choose a suitable buy or sell price, by listing the recent buy sell prices, ranging from the highest bid price to the minimal ask price for each currency pair currently trading.
The trading of forex pairs has to do with pricing a currency against each other. For instance, the trading pair EUR/USD indicates the price of the EURO against the U.S dollar.
The Forex market is traded according to the volume of dollars traded, which happens to be the most substantial market in the world. Regardless, Forex trading is not like Stocks that occur through exchanges.
Forex is an over-the-counter trade, it happens via buyers and sellers trading directly with each other.
Electronic Communications Network (ECN Explained)
An ECN broker is a foreign exchange broker that matches a buy and sells order in the particular currency being traded. This procedure is done through an Electronic Communications Network (ECN).
The ECN is an automated trading system that is highly computerized to match trade orders between sellers and buyers in the Forex market.
Apart from matching the buy and sell orders, the ECN also provides its trader with the present bid and ask price quotes that display the maximum buy price and the minimum sell price presently attainable in the Forex market per currency pair.
Qualities of an ECN Broker
An ECN broker carries out trades for their users across the ECN network. Because of how the ECN broker is structured, trading with the broker comes with low costs and more trading hours.
ECN brokers do not execute their trade orders by moving them to market markers but instead, they match their users in trade and them send the orders to middlemen in the forex market.
An ECN broker is not allowed to trade against its clients, because trades are fixed between its market participants.
ECN tends to charge its clients a fixed fee for each trade, this is because their spreads are tighter than other conventional forex brokers.
ECN Brokers Designed For Experienced Brokers
Using an ECN broker gives traders the ability to trade outside the conventional trading time, thus giving room for forex traders who are unavailable during the daytime and can not trade during the normal trading hours or traders who appreciate the flexibility that comes with trading at different times.
It also curbs the use of wide spreads that are very common with traditional forex brokers, rather they provide their traders with tight spreads.
For traders who are particular about their privacy, the ECN provides a degree of anonymity. This feature tends to favor traders who want to carry out large transactions without getting detected.
ECN brokers do not deal directly with market makers. They are brokers that execute trades through the use of an electronic communications network, they match investors electronically and transfer the orders to brokers who provide liquidity.
Trading with an ECN broker helps in facilitating your trades, with lower spreads, and flexible market hours.
Buyers and sellers are fixed together for the main purpose of executing trades. Now the work of the ECN is to provide an electronic communication system to match their participants automatically.
This is done by giving access to the orders being created, and by ensuring fast execution of the orders. T
his automatic network is structured to randomly match buy and sell orders that are presently active in the forex market. If a detailed order is not given, it offers a list of prices that indicates the maximum bid price and minimum ask price listed in the forex market.
Benefits of Using an ECN Broker
Trading with an ECN broker comes with its benefits: these benefits are as follows.
1. LOWER BIDS AND ASK PRICES
When a trader decides to buy or set a financial instrument, the difference between the buy price and the selling price is referred to as the spread.
All a trader needs to do is to purchase the best sell price available which is the asking price, while a seller gets to pay for the best buy price available which is the bid price.
This is because an ECN matches trade orders immediately using traders that are currently trading in the forex market and listed the cheapest buy price and sell prices. This in turn results in cheaper bid/ask spreads.
Therefore, Forex traders can easily place or close trades in the securities market at a cheaper rate, unlike conventional forex brokers. Dealing desk brokers usually offer higher bid and ask spreads, as they make their money by pocketing part of the spread for themselves.
ECNs provide flexible market hours for their investors, which means their traders are allowed to trade outside the typical trading hours.
Trades are executed instantly, and considerably at a cheaper spread rate. The competition between forex liquidity providers is on the high side, they are constantly looking for trade orders to execute, this makes the spread listed for most trades are very cheap, so they can attract more customers.
Downsides of an ECN Broker
Every company has a main goal of being established, and that is to generate profits. ECN makes its profit. the fixed commission charged per trade.
One of the main disadvantages of an ECN broker is the high price paid for using it. Naturally, the price or commission charged for grading with ECN is higher than that of a conventional forex broker. A fixed charge paid per trade can end up becoming detrimental to a trader, as this commission can affect the trader’s profits.
Best Ecn Forex Brokers
There are so many regulated ECN brokers. Listed below are the best ECN brokers that are highly regulated and offer the best trading conditions with a conducive trading environment, transparent rules and regulations, and good standards.
Pepper stone was ranked as the Best for Scalping and EA ECN in 2021.
ECN Broker VS Normal Broker
A normal forex account does not charge a fixed commission per trade, rather they charge a fixed or flexible spread depending on the Forex pair being traded. In some forex brokers, the EUR/USD always come with a higher spread compared to the other forex pairs.
ECN accounts charge a fixed commission per trade with a tight spread.
Important Things To Note.
There are so many Forex brokers who trade forex pairs in the online market. Most of these forex brokers are not regulated and any financial institution. Most of the forex brokers claim to be ECN brokers which is not the case, they are mainly conventional forex brokers.
One of the best ways to find out if a forex broker is indeed a true ECN broker is by enduring to trade with a strictly regulated broker. Every forex broker that is strictly regulated by a financial institution will always offer all the necessary information needed on their website.
Another method of verifying if you are indeed trading with an ECN broker is that with normal forex brokers, there is always an issue of requoting unlike with ECN, there is no issue of requoting. Requotes are caused by the slow execution of trades by the conventional forex broker.
This is a case of a trader entering an order to sell or buy trade at a particular market price, but due to the slow execution, the trader is given a requote at a different new price of the market.
These delays caused by requotes are not a good thing, because, in a situation where a trader is trading a rapid movement market, they might end up not stressing much.
An ECN forex broker is one of the best brokers to trade within the Forex market, they link to buy and sell orders via an electronic communication network.
This broker is good for so many reasons such as instant execution of orders, transparent rules, and regulations, no hidden fees or commissions.
But one has to be careful before choosing an ECN broker because there are a lot of prototypes out there.