An ECN broker refers to the kind of foreign exchange trading firm which uses an Electronic Communications Network (ECN). They do so to sync buy and sell orders in the forex trading market. Additionally, ECN shows current buy and sell price quotes that depict the highest bid price and lowest offer price in the market for every currency pair available in the market.
Trading pairs are essentially sets of two currencies where one currency is priced against another currency. For instance, the trading pair EUR/USD indicates the value of the Euro with respect to the U.S. dollar.
If one is to measure the dollar volume of trades that take place in the forex market, it is by far the largest financial market in the world. But remember that forex trading does not happen by exchanges like the way stocks are traded. Rather it happens via an over-the-counter market where buyers are directly connected with sellers.
Characteristics of ECN Brokers
- An ECN trading agent carries out the trades over the ECN for their potential investors. Lower costs and better trading time are some key aspects of the way ECN functions.
- ECN trading agents don’t transfer the flurry of orders to the market makers. Instead, they electronically sync buyers and sellers in trade and transfer the orders to third parties that are based in the securities markets.
- An ECN trading agent cannot trade against their customers as they match participants’ transactions. ECN trading agents charge a commission for every trade as the spreads are tight.
ECN Brokers vs. Dealing Desk Brokers
ECN brokers are believed to be far better than dealing desk brokers since ECN allows one to establish a direct connection between potential buyers and sellers.
On the other hand, dealing desk brokers carry out trades by placing themselves on the opposite side of the trade or by forwarding the order to a market maker.
There are two key reasons why dealing desk brokers face criticism.
- One, when they place themselves against their customer’s trade, they make counter investments which creates a conflict of interest.
- Second, when they pass orders to a market maker. this affects the transaction speed and their customer may not get the best price.
Advantages of ECN Brokers
ECN brokers have the following plus points:
Lower bid and ask spreads
Every time you buy or sell financial assets, you will always find a spread that shows the difference between the best possible buy and sells rate. A buyer should always try to pay the best ask price whereas the seller should try to take the best possible buy price.
An ECN instantly matches orders from traders with the best available buy and sell prices in the forex market, which typically results in tighter bid-ask spreads.
When ECN is in use, the bid-ask spreads are tight. This happens because the orders automatically match with the best buy and sell prices. Thus traders can rest assured that they will have their exit and entry points at the best prices than what a dealing desk broker could offer or match them with. Dealing desk brokers typically offer higher bids and ask spreads because that is how they earn money from the trades.
ECNs let their customers participate and carry out trades in market exchanges, beyond the normal trading hours.
Trades happen in an instant with remarkably low spreads. Several traders who can provide liquidity often look for trade orders. This pushes them to put out the lowest rates so they can get over the competition and win over more traders.
Flat commission rate
Rather than earning through the bid-ask spread, ECN brokers already quote a flat per trade commission.
Choose The Best ECN Forex Broker In 2022
Don’t let any kind of choice carry you away. Take into account the present criteria when choosing the right broker.
Consider your needs
Understand what you need and then assess multiple brokers simultaneously to know who is offering the best options. Check the commission size, the types of currency pairs offered, and the quality of customer service.
Do background research to understand their credibility
ECN brokers are gaining a lot of attention in the forex world but you need to ensure your research is in place before you connect with one. Look out for legally obtained licenses from regulatory bodies. Ensure that they have a set standard and are easy to monitor every day.
Check the spreads offered by the broker.
There are no changes in the fixed spreads despite market movements whereas variable spreads keep changing because of market factors. Fixed spreads may appear tempting but they might keep you from making a profit. This happens while fixing spreads are usually put at a much higher level than variable spreads which implies more money for the broker from your pocket.
ECN brokers generally let their customers have variable spreads rather than fixed spreads. Before you accept a broker’s offer to fix a spread, remember that it could actually be more than what you may be willing to part with.
See if the commission is low.
A key aspect of selecting the ECN broker is the commissions they charge and how it fairs in comparison to others in the market. Needless to mention, the less commission you pay, the more profit you will have for yourself. Thus, ensure that you weigh all your options and choose the best one for you.
Check if the execution of trade is quick.
Certain brokers will let you make deposits with any amount of money while some others may refuse to process trades until you have put aside a minimum deposit. Ensure that the ECN broker you choose has a quick execution time as you may want to go in and out of trades quickly in the market at some point.
Is the broker is an absolutely non-dealing desk.
Dealing desk brokers are known to put their trades against their clients. Such a broker would earn from the spread between the ask and bid prices. Non-dealing desk brokers such as ECN brokers would never trade against their clients. Rather they charge a per transaction cost. This is why the transaction cost is relatively higher than that of a dealing desk broker.