ECN Brokers: Advantages, Disadvantages and How to Choose One

Commentary on the latest action in the market.

  Laptop screen displaying stocksECN brokers are Forex dealer in their purest form. Rather than profit on spread difference, they charge a commission. So it’s in their interest to see their clients winning.  AN ECN (Electronic Communications Network) broker is an expert when it comes to Forex. They provide their clients with access to other market participants. They consolidate quotes in order to provide tighter bid/ask spreads. They don’t just serve individuals either. Their clients include single traders, market traders, and banks.  They provide their clients with a marketplace where they can trade against one another by sending offers and bids into the system. Interaction occurs within the system, with traders being able to receive the best offer at that time.

What are the Advantages of an ECN Broker?

  • Variable Spreads: There are always variable spreads offered with an ECN broker. This is due to the fact that they’re unable to control bid/s as a dealer can. 
  • Automated Data: The personal risk management and trading model system of a trader can be connected with the broker’s data feed and matching engine, which provides access to the best prices and best bid, as well as a nice range of additional data. Before starting to trade see ECN brokers reviewed to make sure your broker is regulated and offers a diverse range of bids.
  • Instant Trades: You can see trades occur instantly through live streaming, along with immediate confirmations and the best final prices. Once a trade has been dealt, it’s confirmed and final. There’s no dealing desk to interfere and no requotes either.
  • 100% Anonymity: Any trades that are made with an ECN broker are entirely anonymous. So a trader can deal on neutral prices that only reflect actual market condition.

The Disadvantages of Trading with an ECN Broker

While there aren’t many downsides when it comes to using an ECN broker for your Forex trading, there are a few we should mention. One is the fact that each transaction comes with a fixed commission fee, which is how they make a profit. The likelihood, however, is that it’s more transparent and far cheaper than the costs associated with a market maker.  Market makers profit through unfair prices and larger bid/ask spreads. Another disadvantage is that calculating targets and stops can be a challenge. This is due to the variable spreads and the fact that the price constantly changes. Finally, there’s a chance of slippage. This is particularly possible with session overlap, as clients and other factors influence price ticks simultaneously. 

ECN Brokers Vs Dealing Desk Brokers

An ECN Broker is regarded as being superior to a dealing desk broker, as the ECN offers a direct connection between traders. A dealing desk broker, on the other hand, executes trades by either passing the order on to a market maker or by themselves taking on the other side of the trade.  There are two criticisms of a dealing desk broker. Firstly, if they take on one side of a trade, they are basically investing against their client, which creates a potential conflict of interest. Secondly, if they pass on orders to a market maker, order execution is slower, which can lead to client orders being filled at less attractive prices.

Choosing an ECN Broker

If you’re seeking reliable and solid trading conditions, and you’re a long-term trader who’s serious about Forex, it’s definitely worth considering an ECN broker for the simple reason that they never trade against their own clients.  You should exercise caution, however, as many entities referring to themselves as ECN brokers aren’t that. When you’re looking for a broker who in actual fact deals in ECN trading, you should ask the following questions:
  • Is there any negative slippage? If so, it’s not a genuine ECN broker you’re looking at?
  • Is there a dealing desk involved? If the website mentions a dealing desk, it isn’t the website of a bona fide ECN broker. When you open an account (either demo or real), you should be able to see the difference in pips offered in news reports. There won’t be a difference with a legitimate ECN broker.
  • Are the spreads variable or fixed? A genuine ECN broker will offer only variable or floating spreads.
When you’ve found yourself a legitimate ECN broker, you need to make sure that it’s the right one for you. Once you’ve narrowed down your shortlist to two or three brokers, you’re in a position to compare spreads, regulation, and trading conditions, and can then choose one to suit your wants and needs.  For that, you obviously need a good idea of the qualities that matter to you, as this will assist you in deciding on which kind of broker you should open an account with.  Working with an ECN broker will mean tighter spreads and fixed commission fees. With a market trader, however, they’ll take the opposite side of your trade. You should also bear trade execution and liquidity in mind. Ideally, you’ll be seeking a broker that guarantees instant and seamless order execution at a fair price. One thing you could do is open an account with a market trader and another with an ECN broker and assess the real-time differences without risking actual money. There’s always value in experience. Once you’ve chosen a broker and are okay with risking your own money, make sure to read the terms and conditions. Each broker has its own services, rules, and prices.

A Word of Caution

There are dozens of forex brokers out there. Many aren’t governed by a financial authority. Unfortunately, some brokers that are unregulated call themselves ECN brokers, while, in fact, they are dealing desk broker. To verify that an ECN broker is legitimate, make sure that they’re regulated. A regulated broker will provide details concerning its regulated status right there on their website. Another way to feel confident you’re dealing with a bona fide ECN broker is that you won’t experience a problem regarding requotes. Requotes only occur as a result of the slow execution associated with dealing desk brokers.

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