ECN stands for ‘Electronic Communications Networks’. An ECN broker acts like an intermediate broker providing an improved execution of your trades. They take all the bank quotes and offer its clients the best bid that are available. ECN brokers are the financial Forex experts who use ECN to actually consolidate all the price quotations from various market participants and then provide its clients the direct access to the currency market consisting of many other participants. Since the quotations are from various market participants, it generally offers a tight bid/ask spreads that would be available to its traders.
The ECN spreads are much narrower that the one’s provided by the other Forex brokers and so they charge a fixed commission per transaction that the client makes. This actually doesn’t harm the trader much since they will be able to benefit a lot at a fairer price.
They are not a part of trading, so they don’t trade against you. They provide a market place in which there are other market traders and financial institutions also. In this, the trader can enter bids into their trading software inside or outside the market spreads. This gives the advantage of getting better spreads.
What is ECN Forex Trading?
ECN is seemed to be the future for the Forex Exchange Markets. It can be best described as links between many smaller market participants with tier-1 liquidity providers. This linkage is done with the help of a complex technology setup named FIX Protocol (Financial Information Exchange Protocol). Firstly, the ECN broker obtains liquidity (quotes) from the major banks and makes it available for trading to their clients. Then it delivers the client’s orders to liquidity providers (Major Banks) for execution. We know that an ECN broker takes commission per transaction. So, higher the trading volume of the clients, greater is their profit.
Why ECN Brokers?
The spreads that an ECN broker offers are generally very tight and are as low as 0.5 to 3 pips. Now compare this with the other market brokers, these can be sometimes as high as 8 pips. For day trading, the ECN brokers are the best as it is easier for the brokers to manipulate prices for a short-term.
Most of the ENC’s also allow traders to trade between the bid and the ask spread hoping that the ECN will find another market participant that would match the order. Orders can also be placed outside the bid/ask spread to gain several pips by creating own spread.
In ECN Trading, the chance of getting a lower ‘ask’ for buying and higher ‘bid’ while selling is more. The Liquidity that ECN provides is extremely large and due to this there might be huge price swings of profit for the traders. A single second difference at times can make a several pips gain or a several pip loss.