ECN Broker: Best US Practices & How to Make the Best Choices

ECN Broker
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What is an Electronic Communications Network (ECN) Broker?

ECN brokers are platforms that employ the use of electronic communications networks (ECNs) to provide clients with direct access to other market players in equities and currency markets. And because an ECN broker aggregates price quotes from multiple market participants, it may typically provide tighter bid/ask spreads to its clients—particularly forex traders—than would otherwise be available.

Furthermore, an ECN broker can only match deals between other market players and not against the client. But while ECN spreads are frequently smaller than those offered by traditional brokers, ECN firms nevertheless charge a fixed commission for each transaction.

Understanding How an ECN Broker Works: What You Need to Know

The usage of an ECN allows investors to trade outside of standard trading hours, offering a tool for those who are unable to participate actively during regular market hours or want the flexibility provided by greater liquidity. It also avoids the bigger spreads that come with traditional brokers, as well as cheaper commissions and costs overall.

The ECN can provide anonymity to people who desire it for those who are concerned about privacy. This can be especially appealing to investors looking to make larger deals.

However, non-dealing desk brokers, or ECN brokers, do not send order flow to market makers. Instead, they electronically match trade participants and transfer orders to liquidity providers.

So, an ECN broker regulates trades across the ECN for interested investors. And because of how the ECN works, working with brokers of this type generally results in lower fees and more trading time availability.

The Electronic Communications Network: An Overview

The ECN is an electronic system that connects buyers and sellers for the purpose of conducting trades. This is accomplished by allowing access to information about orders that are being filed as well as easing the execution of these commands. The network is meant to match current purchase and sell orders on the exchange. When individual order information is unavailable, it displays prices based on the open market’s highest bid and lowest ask.

Benefits of ECN Trading (Forex & Stock)

ECN trading and direct connectivity with liquidity providers have a number of advantages. Here are a few examples:

  • Prices are higher in the bid and cheaper in the ask.
  • Spreads that are tighter
  • Better liquidity and direct trading
  • Immediate trade executions are available.
  • Brokers are not permitted to trade against their clients.

Let’s take a quick look at each of these advantages.

#1. An ECN Broker Offers Tighter Bid-Ask Spreads for Forex Participants

An ECN broker, as previously said, serves as a hub for a variety of Forex market participants. Commercial banks, hedge (investment) funds, and other players are examples of these players. This also means that ECN brokers pool all of those players’ bids and ask price quotes.

But because there are so many players in one spot, it’s unavoidable that higher and lower bid/ask prices will be quoted in this “hub.” On the one hand, liquidity providers with lower bid prices and higher ask prices will result in wider spreads.

Conversely, there will undoubtedly be those with higher bids and lower ask prices, resulting in tighter spreads.

In any case, traders can acquire currency pairs at a lower price from one liquidity provider and sell them at a higher price from another. That is the benefit of using ECN networks.

#2. Direct Executions on the open market

Another significant advantage of an ECN broker is that they do not interfere with the relationships between Forex traders and market participants. This means that, unlike STP brokers, who record traders’ positions and negotiate them directly with liquidity providers, ECN traders can negotiate their transactions directly with market participants at the best possible terms.

For instance, when a trader opens a position for one lot of the EUR/USD pair, they won’t have to wait for their broker to take the position to the liquidity provider and negotiate it. Instead, consumers can do it themselves by negotiating with the most appropriate EUR/USD provider on the site.

As a result, assets are extremely liquid, as there are no intermediaries between trade partners. This means that currency pairs can be bought or sold quickly between a trader and the liquidity provider with whom they’ve partnered.

#3. Trading against clients: ECN Account vs. a Conventional Account

This has to do with trading against the clients’ positions. STP brokers frequently open positions that are diametrically opposed to those taken by their clients. When a trader establishes a long (buy) EUR/USD position and the broker delivers it to the liquidity provider. It will then initiate a position that is the direct opposite – a short EUR/USD position of the same amount.

Many STP brokers trade against their clients because it allows them to earn higher commissions. For example, if a trader loses money on the above-mentioned trade, the broker will be compensated, but if the trade is profitable, the broker will lose money.

However, as previously stated, ECN networks are not designed to convey trading positions to liquidity providers. Traders, on the other hand, do it themselves. As a result, an ECN broker will be unable to go against their clients’ Forex holdings.

Drawbacks of ECN Markets

For the reasons stated above, trading Forex with an ECN broker is advantageous. However, this does not negate the fact that they have drawbacks. Many traders tend to avoid ECN brokers due to excessive service charges, commissions, and other factors. So, here are some of the drawbacks in a nutshell:

#1. High Deposit Requirements

ECN brokers have high deposit requirements since they facilitate direct connections between traders and liquidity providers. They also have high service charges. That is why, in order to open an account, they normally require a higher initial deposit.

#2. No micro-lots

This is linked to high service costs and liquidity provider requirements. The majority of market participants represented on this platform have a minimum position size of 0.1 lots (10,000 currency units). As a result, traders are unable to open positions in increments of 0.01 lot (1,000 currency units).

#3. Standard vs. ECN account

Because ECN brokers do not accept spreads as payment for their services, they have set charges and fees for each transaction. And those commissions are typically fairly expensive, demonstrating once again that while the FX ECN market share isn’t particularly significant, costs are nonetheless rather high.

Of course, there are also drawbacks to using ECN brokers. For example, the platform is quite difficult to use, and traders struggle to comprehend all of the concepts and tools required for this type of trading.

As a result, the question is whether the services provided by ECN brokers are worth the high costs.

The Electronic Communication Network may be a better solution for you if you wish to establish huge positions with tighter spreads. However, if your budget is limited and you are unable to open huge positions, STP brokers may be a better fit for your needs.

How to Choose the Best ECN Brokers

To determine whether a broker is offering a honest ECN trading, a few questions should be asked:

Are the spreads fixed or are they subject to change?

Only floating or variable spreads will be offered by a true ECN broker.

Is there a trading floor?

You’ll know you’re not dealing with a legitimate ECN broker if the company’s website mentions a trading desk. You can see the difference in pips supplied during news reports by opening a real and a demo account. There will be no difference if you choose a real ECN broker.

Is there any backsliding?

If you answered yes, you aren’t dealing with a legitimate ECN broker.

Once you’ve discovered a list of legitimate ECN brokers, make sure you choose the right one. With the names of two or three brokers, you can analyze trading conditions, regulations, and spreads to help you choose the broker that best meets your needs. We’ll provide you several outstanding ECN brokers to consider, as well as a variety of other broker types in a different post.

You should have a clear notion of the attributes you want in a broker because this will help you choose the right one. Basically, fixed commission prices and tighter spreads are two advantages of trading with an ECN broker. A market trader, on the other hand, will take the other side of your trade.

Liquidity and transaction execution are also important considerations. Ideally, you’ll be looking for a broker who can offer seamless and rapid order execution at a reasonable fee.

The best course of action is to register an account with an ECN broker and a market maker and compare the two in real time without risking any money. It’s impossible to overestimate the value of firsthand experience.

Once you’ve selected on a broker and are willing to put your hard-earned money on the line, read the fine print carefully. Don’t be tempted to check the box indicating that you agree to the terms and conditions without first reading and comprehending them. Each broker will have his or her own set of rules, services, and fees.

Bottom-Line

As you can see, trading using an ECN broker allows you to trade more effectively and profitably due to improved trading conditions and execution—even with the drawbacks. All you need is research and a strategy to scale through the uncertainties.

Takeaways

  • Transactions over electronic communication networks are facilitated by ECN brokers (ECNs).
  • These brokers provide clients with direct access to stock and currency markets on ECNs that they would not otherwise have.
  • While ECN systems provide transparency and deep liquidity, they are more expensive than traditional exchanges.
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