The Ultimate Guide to
How to Find the Best ECN Broker For You
The Electronic Communication Network (ECN) method of executing trades is one of the most transparent methods of trading available to retail traders. This is because ECN brokers allow the trader to get access to the actual pricing of currencies as set by the big banks (who function as liquidity providers), while also displaying the orders of the trader in the market.
This is in contrast to the market making system where pricing and order fulfilment is handled internally by the market maker’s dealing desk. So the ECN brokerage provides a non-dealing desk environment which allows the trader to trade against other traders and the banks, and not the broker itself.
Advantages of ECN Brokers
The ECN system ensures the full transparency of pricing and trade executions since everything is fed from the liquidity providers to the trader (pricing and trade execution) and from the trader back to the liquidity providers (trade orders), without any interference from the broker.
In addition, the direct market access (DMA) technology which provides access to pricing from several liquidity providers ensures that there are no re-quotes and execution as the order price is virtually guaranteed.
Some of the further advantages of ECN Brokers are:
- Traders have a choice of what bid and ask prices to use for their orders, since the pricing is being provided by not just one, but several liquidity providers.
- All trading strategies including scalping are accepted on ECN platforms because ECN brokers make more money the bigger the deal flow and not from winning or losing the trades of customers.
- ECN brokers are able to fill larger orders as trades are routed to several liquidity providers and not just a single buyer/seller.
- By having access to the Order Book, it is possible for traders on the ECN platform to visualize the bids and ask prices at which other market participants are trading. This will provide some idea as to where the order flows are going and provide some insight into the future direction of the market for a currency pair.
Challenges of Using an ECN Brokers
One factor that traders have to contend with is the cost of ECN trading. ECN brokers will generally charge a commission on every trade placed and it is only economical for larger trades and higher frequency traders as compared to the market maker model of only charging a spread markup.
Liquidity requirements are also high with ECN trading since the trader is dealing directly with the liquidity providers. Unlike the market maker model where the market makers provide liquidity intervention on behalf of traders, the responsibility of meeting the liquidity requirements in the ECN model rests solely on the trader. As such, the account opening capital requirement for an ECN account is much higher, for example, LCG have a minimum deposit of £10,000 to open an ECN account.
Some of the other challenges facing ECB Brokers include:
- Traders have to contend with variable spreads (spreads can widen in an instant when volatility is high) and also have to pay commissions for trade entry and trade exit.
- Minimum trade sizes tend to be much larger and due to the commission charge when entering and exiting a position, it is not as viable for smaller trades.
- To get the best prices, clients will have to meet minimum trade requirements. This is generally not a problem for traders who meet certain conditions and benefit from the lower prices. For example, for the lowest commission tier of $7.50/million traders need over $2 billion in forex trading volume per month with LCG.
ECN Brokers Conclusion
There are several brokers that provide both market making and ECN trading models. There are brokers that are exclusively ECN brokers, and others which work exclusively as dealing desk market makers.
As a general rule, ECN brokers are suitable for traders who can meet the capital requirements and want a trading platform with generally superior trading conditions.
