Liquidity and direct access to markets are two of the most crucial aspects of foreign exchange trading. Many “old school” forex brokers are called “dealing desk” brokers. This is to say. They mediate your interactions with liquidity sources like banks, brokers, and other traders. Some investors choose 24-hour direct market access to avoid these middlemen altogether. ECN brokers play a crucial role in this context. An electronic communications network (ECN) is a trading platform that eliminates the need for a broker and provides traders direct access to global stock and currency markets.
If used correctly, ECNs can provide enormous value to traders. Those willing to avoid intermediaries may look into the services provided by a brokerage that includes access to an ECN. If so, you should read our in-depth primer on ECN brokers before making any trades on, Pepperstone mobile app.
What exactly is an ECN?
As was previously stated, “electronic communications network” (ECN) is an abbreviation. Traders can gain immediate access to the equity markets through these automated, algorithmic networks. A forex trading platform is a network that facilitates transactions between buyers and sellers of foreign exchange (FX).
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Due to the absence of a dealing desk, you can negotiate your terms while buying and selling. You may already be aware that many brokers serve as market makers and, as such, must collect a “spread” from their clients to cover their expenses (i.e., facilitating forex trades). The spread you pay while trading with an ECN broker is lower than with a traditional broker (i.e., the difference between the bid and the asking price of a currency pair).
ECN brokers typically don’t charge a spread. The ECN broadcasts the orders entered by the various market players directly to the traders and other parties involved. An algorithm that compares the asking prices of buyers and sellers can then execute these orders at best possible market price.
Because this network connects large and small traders with liquidity providers, you can participate in the foreign exchange markets, notwithstanding the size of your trading account.
How Does an ECN Account Differ From a Regular Account?
There are two main categories of FX brokerage accounts: market maker accounts and ECN broker accounts. The “conventional” forex brokers are called market makers, and they operate as intermediaries by placing their spreads on currency pairings to generate revenue.
Spreads typically cover a market maker’s costs, so they do not charge a fee on individual trades. This means that the greater the spread, the higher the transaction costs associated with trading currencies on the foreign exchange market. However, electronic communication network (ECN) brokers bypass intermediaries by linking you directly to other traders and liquidity providers.
An ECN algorithm will automatically pair you with the market’s best buy and sell prices to eliminate spreads and save money. However, there is a fee associated with using this service. Since ECNs necessitate exclusive access to the market and cutting-edge infrastructure, most brokers operating within this space will charge clients a fee for each trade they execute.
This may result in even higher costs than the spreads you are already paying. Yet, as we will see, there are several other significant benefits to ECN brokers beyond just reduced fees.
What makes ECN so well-liked by so many people?
ECN brokers are extremely common among certain sorts of traders for various reasons. Due to the spread system’s inherent autonomy for market makers to adjust prices at will, many forex traders find it unacceptable. Some might view this as anti-competitive pricing that hurts small businesses.
It also needs to be clarified why you are being asked to accommodate particular spreads, as spreads are rarely transparent. In contrast, ECNs facilitate a transparent and competitive pricing structure because buy and sell prices are effectively settled through an auction.
Additionally, unlike market marker brokers, an ECN broker will never take a position against a trader. You can avoid market maker brokers’ annoying features like expensive re-quotes and delays to liquidity by using an ECN broker instead. These are among the main factors that have contributed to the rise in the popularity of ECN brokers in recent years.
ECN’s Benefits
ECN brokers offer several advantages over traditional market maker brokers. Most crucially, ECNs eliminates the need for a hidden third party to facilitate trades on your behalf by giving you direct access to the market and all other players and liquidity providers. As a result, under the right circumstances, your bottom line will increase significantly due to access to the market’s lowest prices.
Furthermore, ECNs are far more open than conventional brokers in that they provide access to the fx market’s actual prices on your feed and allow you to view pricing history, so you can rest assured that you are not getting ripped off.
By keeping everyone’s identities hidden during transactions, ECN brokers can provide fair pricing that accurately represents the state of the market.
Therefore, it is recommended that traders who value privacy use ECN brokers. Last but not least, ECNs allow for instantaneous trading. When you make a purchase or a sale, the transaction is complete. There is no need to go through a drawn-out facilitation process, and you won’t be hit with a re-quote later.
ECN’s Drawbacks
However, you should be aware of the risks associated with ECNs. The cost of using an ECN is easily the biggest drawback of these systems. Since ECNs are premium services that typically employ sophisticated, expensive technology, all brokers will impose a commission on any trader who requests access to an ECN.
Traders must carefully consider the pros and cons of ECN trading to ensure they are spending only what they would with spreads. Every trade incurs a standard fee. Earning money in this way is how ECNs thrive.
Furthermore, ECNs might be difficult to utilize for novice traders. There are so many people and things influencing the network that asset prices are always changing. Due to this, implementing a strategy or even a stop-loss with an ECN can take time and effort. It will help if you only utilize them if you’ve mastered their operation.