What is an ECN Broker?

What is an ECN Broker?

Let’s start with an explanation about what an ECN broker is and does

ECN is an acronym for Electronic Communication Network. As the name suggests, it is a network that allows market participants to communicate bid and ask prices as well as trade volumes to each other. The ECN and the broker are facilitators of trade so participants can deal with each other. The great thing about a ECN broker is that they are neutral to the outcome of your trades. Once they receive your order, they will match and process it with their liquidity providers and receive remuneration from a small commission for executing your deal. This is usually separate to the spread which has to also be taken in to account.

Further to this, their job is to provide you with a safe, secure and stable trading environment to deposit withdraw and execute your trades on. For the former two features, we would only ever trade with a licensed and regulated broker. Therefore, any broker mentioned on this site will be authorized by the appropriate governing authority. A good ECN broker will focus on improving their technology, infrastructure and pricing so you receive better trading conditions and don’t go looking for a new one.

A ECN Broker can provide you with great trading conditions

Before opening a trading account, please understand that just because you want to trade with an ECN broker, this will not help you become a consistently profitable trader. Education, practice and a method that provides you with an edge in the market will. What trading with an ECN broker may do though is provide you with better trading conditions by reducing your transaction fees, improve execution speeds and reduce the probability of slippage.

Trading on a ECN account type, that has a separate fixed commission is more competitive than trading on a classic account type. On the classic account types, all transaction fees are built in to the spread, which is usually higher.

The pricing on an ECN is not exclusive

If ECN’s were exclusive and separate of each other, this would create parallel market places where the possibility for significantly different prices for foreign currency could exist. Imagine several standalone ECN brokers participating on different networks. There may be huge orders to buy or sell a particular currency pair on one ECN but few orders to buy or sell the same currency pair on another. What you would end up with is high price volatility on one ECN and a quiet market with low volatility on the other.

There is only one forex market with uniform pricing for all

If you compare the pricing between ECN brokers or market makers, the variance is insignificant. Although forex is an over the counter market (OTC), price feeds usually originate from few sources. There is only one forex market and that is the interbank market. Every broker is participating in that in one way or another through the relationships they have with liquidity providers and other broker dealers or banks.

The image below will help illustrate how these relationships work.

ECN Broker

The big banks make the forex market

As you can see, the inter-bank market is made up of a series of banks connected to an electronic brokerage service (EBS). They quote prices to buy or sell foreign currency between each other and create a somewhat orderly market. All other market participants, like ECN brokers and market makers are connected to them in one way or the other.

Since the banks make the forex market they are usually referred to as liquidity providers. However any entity or trader that is taking the opposite side of your trade is essentially acting as a liquidity provider too.

Leave a comment