Time to Learn the Benefits of Using a True ECN Broker for Your Forex Trading
Some say it is the only real future for Forex trading, and some of you reading this may be wondering what on earth we’re they’re talking about. For those who want to learn more about this particular way of trading, we aim to introduce you to the concept of ECN Forex trading, explain some of the benefits, look at any downsides, and help you to find the best ECN Forex brokers for your needs.
What exactly is ECN Forex Trading?
ECN stands for Electronic Communication Network, and refers to a type of computerized network or forum that can be used to enable the trading of financial products, in this case, foreign currencies. It is usually an electronic system that distributes orders entered by market makers to a number of third parties. It then enables the orders to be executed in part or in whole. And it’s not only currencies that can be traded in such a way. It happens with stocks too. The network acts like a kind of bridge between liquidity providers, for example major banks, and smaller market traders, like those of you reading this page. Via an ECN Forex broker. This is all enabled by a very sophisticated technological system which is called FIX Protocol (Financial Information Exchange Protocol). A Forex ECN broker makes its money by charging commission on each transaction. The more trades its enables, the higher the return.
What are the advantages of trading using the best ECN Forex brokers?
- Guaranteed anonymity – If you decide to trade via an ECN Forex broker you can be certain that no one else will know who you are. Anonymity also allows trades to take place using neutral prices that reflect true market conditions. There is no bias against the client’s direction based on Forex trading strategies, market positions, or tactics.
- Execution of trades in instantaneous – Trading takes place via live streaming which means a trader gets the best executable prices, and the order is confirmed immediately. There are also no re-quotes, because there is no-dealing desk to get in the way.
- No fixed spreads, only variable ones – Because an ECN Forex broker has no control over the bid/offer spread, it cannot offer the same spread at all times.
- Automated data – If a trader has a personal trading model or risk management system in place it can be connected to an ECN brokers data feed and matching engine. This means they have access to the best bid/offer prices, as well as certain other data.
- Access to global liquidity providers – With ECN a trader is able to trade on the global liquidity of leading world banks and other qualified financial institutions.
There is one last benefit worth mentioning, and that is the fact that an ECN broker only matches trades between market participants, and cannot trade against its clients. Which is something that many people worry about when using certain types of retail Forex brokers, such as market makers.
But let’s not forget the downside, as there usually is one. You’ll be pleased to know there aren’t many cons when it comes to ECN Forex brokers. Some of you will be disappointed to learn that they charge a fixed commission fee for every transaction. However, it might cheer you up to learn that it is often cheaper, and certainly more transparent that anything charged by a market maker. Another downside is that calculating stops and targets can be a little difficult when using an ECN platform, because prices are constantly changing and because of variable spreads. Slippage is also possible, in particular when a session overlaps. All due to clients and various factors are having an influence all at the same time.
Tips on choosing the best ECN Forex brokers
Now you’ve learnt a bit about how it all works, you might be wondering how you can go about finding the best one. Long term traders should definitely consider trading with ECN brokers because you can be sure they’ll never trade against you. But a word of warning, because not all ECN brokers are what they seem. A good way to find out whether you are planning to trade with a real ECN broker is to ask yourself a few simple questions.
- Is there a dealing desk? If the broker’s site makes mention of a dealing desk then you can be certain you’re not dealing with a true ECN broker. You can also tell if you open a real and demo account. A real ECN broker will have no difference in pips being offered during news reports.
- Are they offering fixed or variable spreads? You probably already realize what the answer to this one should be. A true ECN Forex broker never offers fixed spreads, only floating or variable ones.
- Is there negative slippage? A true ECN broker will always answer no.
Now you’ve been able to determine whether the ECN brokers you’re considering are bona fide, it’s time to think about how you can pick the right one. Providing you’ve got a few names in the hat it will be helpful to compare trading conditions, regulation, and spreads. And make sure you pick one that fits your requirements perfectly. We will feature some of the best ECN Forex brokers right here on this site, as well as a number of other types of brokers.
What sort of qualities should you be looking for? With an ECN broker you can be sure of fixed commission fees, and tighter spreads. Whereas a market maker will always take the opposite site of your trade. Other qualities worth considering are trade execution and liquidity. Preferably you want a broker that guarantees seamless and instant order execution, all at the best possible price. One course of action we’d definitely recommend is to open a demo account with both types of broker, and then you can test them both out and understand the differences much better, without risking any real money. You can read about somebody else’s experiences for hours, but it will never match first hand experiences of your own.
When you’ve decided on a broker spend some time reading all the terms and conditions connected with trading. It has become very common for us all to simply tick the box to say we’ve read them all, without actually understanding what we’ve signed up for. Come on, you’ve got to admit that you’ve done it at least once. This time, however, our advice is to read them very carefully, as each individual broker will have their own set of rules, services, and prices.
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Choosing an ECN Forex broker is not the only option open. There are a number of other Forex brokers available today in the Forex industry. We’ve already looked at the benefits of using an ECN broker, so let’s now explain what your other options are.
- Dealing desk – Also referred to by the initials DD, this type of Forex broker is a market maker. A dealing desk broker provides a trader with 100% fixed spreads, which can be above or below the real market price. A market maker makes money through the spreads, rather than charging a fixed commission like an ECN broker.
- No dealing desk – An NDD (no dealing desk) broker offers direct access to the interbank market. This type of broker can be either an ECN or STP broker, or a combination of both.
- STP – The abbreviation stands for Straight Through Processing. Transactions are computerized and processed instantly on the interbank market, without any intervention from the broker.
- Multilateral trading facilities – This type of broker is generally not regulated, so we wouldn’t really recommend them. They ensure that both sellers and buyers come together in accordance with non-discretionary rules.
Let’s finish up with a little bit of history in relation to currencies and ECN trading.
A brief history of ECN Forex trading
The connection between ECN and foreign currency trading is really rather recent. The first was based in New York and formed by Matchbook FX in 1999. All the way back then, prices were created and supplied by Matchbook’s traders and users, which included banks within the ECN network. At the time this was pretty unique because it enabled buy-side FX market participants to be price makers as well as price takers. Nowadays there a number of different ECNs such as OctaFX, DMALINK, Bloomberg Tradebook, 360T, Hotspot FX, and a number of other names. All provide access to an electronic trading network, which are supplied with streaming quotes from top tier banks across the globe. The engines that match prices are able to perform checks and match orders in milliseconds. The order book doesn’t use a routing system that sends orders to individual market makers. Instead, it is a live exchange type book that works against the best available bid/offer prices for every quote.
Using an ECN broker for Forex trading means a trader can benefit from greater price transparency, speedy processing, more availability as well as increased liquidity.