ECN Forex Brokers
Retail forex trading has come a long way in the past decade, primarily due to the creative efforts of the brokerage community to act as middlemen between the global Interbank market and their clients. If one were to go back to the nineties and before, trading currencies was limited to large banks, hedge funds, and wealthy investors since the barrier to entry lot size at the time equated roughly to $1 million.
Forex brokers, however, soon learned to aggregate their client orders, arbitrage their risk from their liquidity providers, and offer bid/ask quotes for much smaller lot sizes. The era of retail forex trading was born. These actions in many ways were typical of a “market maker” in the world of stocks and securities, although there were several differences, the biggest being that there were no organized trading floors to establish discipline and regulate how brokers actually determined their rate spreads. Over time, this dichotomy of having to trade on their own account and to make offsetting gains from differing client spreads led to the development of what is known as an “ECN” broker.
| Broker | Features | Regulator | Platforms | Next Step | |
|---|---|---|---|---|---|
 Between 74-89% of CFD traders lose
Founded: 2010Between 74-89 % of retail investor accounts lose money when trading CFDs |
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ASIC, FCA | MetaTrader 4, MetaTrader 5, cTrader | ||
 Your capital is at risk
Founded: 2006Europe* CFDs ar... |
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ASIC, FSA, FSB, MiFID | MetaTrader4, Sirix, AvaOptions, AvaTrader, Mirror Trader | ||
 Your capital is at risk
Founded: 2014 |
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FSPR | MT4 | ||
What is an ECN broker?
One definition on the Internet for an ECN broker reads:
“A forex financial expert who uses electronic communications networks (ECNs) to provide its clients direct access to other participants in the currency markets. Because an ECN broker consolidates price quotations from several market participants, it can generally offer its clients tighter bid/ask spreads than would be otherwise available to them. Since an ECN broker only matches trades between market participants, it cannot trade against the client, an allegation often directed against some unscrupulous retail forex brokers. Because ECN spreads are much narrower than those used by everyday brokers, electronic communication networks brokers charge clients a fixed commission per transaction.”
Most all market makers in the forex industry never resort to the unscrupulous activities cited above, but the temptation is always present, and new ECN brokers have taken full advantage of a client’s concerns for propriety in their marketing campaigns. Nearly every ECN broker informs the prospective client that he will never have to worry about his broker trading against him in the backroom. ECN’s flout their transparency, but ECN’s are not for everyone. Spreads may be tight, but transactional pricing may outweigh any perceived benefits.
How exactly does an ECN broker operate?
Many believe that ECNs are the wave of the future in forex trading, mainly because they seemingly eliminate the conflict of interest concern present with every market maker. As for how an ECN operates, think of them as bridging the gap between large Tier-1 banks and orders from small retail traders. The technology that enables this linkage is fairly sophisticated and goes by the name of FIX Protocol (Financial Information Exchange Protocol). A good ECN has many arrangements with major banks and funnels your orders directly to their liquidity providers at the stated spreads. You may also see the term “STP” used by an ECN, standing for “Straight Through Processing”.
These spreads may be near zero at times for major currency pairs, but the ECN makes his money on a commission or transactional basis. The ECN also cannot control the spreads at any given moment, so the trader must become accustomed to variable spread pricing. Trading platforms for ECNs tend to be more cumbersome and take some time getting used to, but it goes with the territory. For clients with large account balances and a high volume of trading activity, the ECN obviously offers the best way to go. For retail customers with smaller account balances and less willingness for high-volume trading, the market maker may still be the best fit for your trading activity.
Pros and Cons
Pros for an ECN:
- Bid/Ask spreads will undoubtedly be tighter, due to dealing directly with a large number of large liquidity providers;
- Spreads may even approach zero at times;
- Order execution is near instantaneous and re-quotes or order slippage are no longer issues;
- ECNs will not be trading against you in the background or manipulating spreads to trip your stop losses;
- ECNs by their inherent nature are able to accept all trading modalities. In other words, scalpers and automated trading are welcomed;
- Price volatility may also be enhanced, thereby favoring a scalping strategy.
Cons for an ECN:
- Support tools may suffer since it is difficult to integrate charting software and news feeds with variable source feeds from several providers;
- Trading platforms may be more cumbersome;
- Commission pricing may not suit your individual trading strategy;
- The ECN may not offer the higher levels of leverage that many traders prefer;
- Placing stop loss and take profit orders may require a different approach with variable spread quoting.
Please be aware that trading is risky and can result in significant losses.
Concluding Remarks
Most active traders have elected to go the ECN route. Most brokers tend to focus on either being an STP ECN or market maker type of operation, but in many cases, the larger brokers, like FXPro.com, offer both service types. Large institutional clients tend to prefer an ECN option. Learning to navigate the proprietary trading platform may require an investment of time, but many claim the effort is worth it. Commissions over time may tend to beat spread pricing, especially when spreads are near zero.
Which type of broker is best for you? If you are wed to the Metatrader4 trading platform and employ a rather simplified approach to trading, then you may want to stick with your market maker. If you like higher levels of leverage, regardless of the risk involved, and like to wager small amounts when you enter the market, then you may also prefer a non-ECN broker. In this case we recommend AvaTrade or Markets.com.
For those traders that have larger accounts, an ECN may be the only way to go. If you thrive by employing scalping techniques, EA assistants, or automated trading robots, then there is no question that an ECN environment is best suited for your needs.
The ECN forex broker may be the wave of the future, but at this time, it may not suit everyone’s tastes. Make a true assessment of your individual needs, and then experiment with an ECN to see if the proof is in the pudding! Good Luck!