ECN is a Broad Term in Forex Trading Model and Can Be Often Mis-represented. So What Makes a True Ecn Forex Broker?
ECN brokers, also known as Electronic Network Communication brokers, are brokers that provide direct market access and direct pricing to traders from several different liquidity providers. This service allows traders to choose the most competitive pricing and ensures that traders' orders are dispatched directly to the liquidity provider whose price he has chosen. ECN brokers do not operate a dealing desk, and hence do not interfere with the pricing structure that obtains in this environment.
ECN brokers make their money from the variable nature of the spreads and also by charging a commission for the use of the ECN platform. In order to cover the cost of administering this environment to traders, ECN brokers usually demand a large capital outlay from the trader. It is not unusual for ECN brokers to demand as much as $50,000 as account opening balance from traders, and this is why the ECN service is mostly patronized by institutional level brokers.
ECN brokers are also known as non-dealing desk (NDD) or direct market access (DMA) brokers. ECN brokers are the direct opposite of market makers, who operate dealing desks and are known as dealing desk (DD) brokers. Dealing desk brokers provide only one source of pricing, and this comes from the broker's dealing desk. Learn about the different types of ecn brokers.
The market maker purchases the asset at a competitive price from a liquidity provider, and then sets a slightly marked-up price before sending it to the trader via the trading platform. The trader will then place the order, where it goes back to the dealing desk and is manually executed by the dealing desk operator. This situation results in the following scenarios for the trader.
Firstly, pricing is not transparent and subject to the whims and caprices of the dealing desk operator. Secondly, by purchasing and reselling the asset to the trader at a mark-up, it is the market maker who bears the impact of a winning or a losing trade from the trader. It is the market maker versus the trader. This situation puts the market maker in conflict with the trader and this manifests in some of the problems associated with trading with dealing desk brokers such as re-quotes and slippages.
Spreads are usually fixed and use of the trading platform is usually free. Brokers who offer the Currenex Classic platform operate an ECN environment, while brokers who offer the Currenex Viking platform offer the dealing desk environment. More about the different Currenex platforms. From the description given above, it is clear that the advantages of using an ECN broker far outweigh that of the market makers.
With the ECN brokers there are no re-quotes, no slippages and traders are not subject to some unwholesome practices bordering on price manipulation such as stop hunting. Many market makers are guilty of this practice and last year, the Commodities and Futures Trading Commission (CFTC) handed down hefty fines to a well known US broker over this practice. Traders using an ECN broker do not need to worry about this.
Recently, some confusion has been created by brokers claiming to provide ECN-style trading environments while still possessing many of the features that are usually associated with the dealing desk environment. Some even claim to offer ECN trading environments with a minimum account opening balance of $1,000. Many traders have been baited by this and jump in, only to discover that there is very little difference between the operations of these brokers and the dealing desk brokers.
So the question is: how can you recognize a true ECN broker?
One way to tell if a broker is a true ECN or not is to look for whether the broker charges a commission for the use of the platform. The ECN environment requires technology solutions that are more complex: more servers, more bandwidth, etc. All this has to be paid for. If the broker claims to be an ECN brokers and does not charge a commission or provides fixed spreads, that broker is a market maker and not an ECN broker.
Re-quotes and slippages are alien to the ECN environment. If a trader experiences any of this, then he is more likely dealing with a market maker. Do you use the MetaTrader software to trade? This product is exclusively for market makers and not for ECN trading. If the broker says you can trade "ECN" with a $1,000 account balance, just know for sure that this is not the case. ECN accounts typically start from $20,000 and above.
Over the past few years as someone who has been actively involved in trading forex online and having managed to trade with market maker/fixed spread brokers the advantages of trading with an ECN forex broker truly outweighs the benefits offered by fixed spread brokers.
These above tips will help you decide what trading environment you are really on. It is not difficult to recognize an ECN broker if you know what to look out for.
