New traders will come across several technical terms when dealing with the forex market. ECN is one of them. At first, it may seem overwhelming and difficult to understand. But once you have a hold on the FX jargon, the rest kind of falls into place. Here, we want to look at one such technical term traders are bound to come across. We’re here to answer the question: what is ECN?
What ECN means
The foreign exchange market has several different brokers. They provide several products to their clients. These brokers offer just as many trading services as well. Let’s make a shortlist of the types of brokers in forex trade.
- STP/regular brokers
- Dealing desk/DD brokers
- ECN brokers
There are several ways that you define ECN but let’s look at it this way. ECN is an abbreviation for the term Electronic Communication Network. It connects big brokerages with individual traders. So they conduct deals without the middleman.
But let’s take a closer look at what this system actually does.
How do ECN work
Computerized systems, like ECN, have changed the way we do trade on the foreign exchange market.
ECNs identify and display the best possible bids and ask quotes from several market participants. Then it makes automatic matches and executes orders based on those bids and quotes. Traders use them for trading after the market closes and for trading foreign currency as well. A trader can also use ECN during market trading hours.
The job of ECN brokers is to give traders direct links to liquidity providers. At the same time, they reduce spreads to the greatest possible extent. Even better is the fact that the brokers seldom profit from these spreads.
Instead, they rely on commissions to fund their operations.
The main role of ECN is to eliminate third-party involvement in order executions. Without this system, the over-the-counter or exchange market maker would input these orders. With ECN, the orders are either partially executed or wholly executed by the system.
It is normal to place limit orders with ECN. That’s because of the crazy effect after-hours trading can create on stock prices. Using this system is a safe and handy way for traders to continue conducting business after the close of the market on trading days.
Sounds a little difficult? Here’s a simplified version of what ECN does, broken down into steps.
- Global banks are examples of liquidity providers. They place buy orders and sell orders into ECN servers. Once they do that, they make the quotes available so their clients can trade with them.
- Traders on the opposite end of the system now have access to a variety of execution quotations. The software shows them where to place the bids for the best outcome. It also shows them where to find the best ask rates the market has to offer. So, the system acts as the go-between for the liquidity provider and the trader. There is no go-between (market maker) or middleman’s fee to pay.
- By matching ECN trades amongst market participants and then sending the orders to liquidity providers, an ECN broker gives clients direct access to the currency market.
Advantages of trading with ECN
So, we’ve talked about what ECN means and how ECN works. We’ve compared using ECN to trading using different types of brokers. Now, we want to take a look at whether this system is worth the hype.
Using ECN gives traders a chance to conduct business outside their standard trading hours or after the market closes. It offers a way for those who cannot be active participants during regular operating times to do business. It also narrows wide spreads down that come when dealing with traditional brokers.
Working with ECN also removes the middleman or broker. What does that mean for the trader? It cuts the fees traders would have to pay to do business with said middleman or broker. Using ECN means that traders pay cheaper commissions while lowering overall trading costs.
The final advantage ECN offers is anonymity. Traders who want to make larger deals usually prefer to do so privately. ECN will give you the privacy you need to conduct business.
Let’s break down these advantages a little further.
There are four main takeaways here.
- ECN will give traders a chance to work outside business hours. It means that traders around the world are not limited by geographical locations or time zones. So, those who cannot trade during regular hours have the opportunity to do so.
- ECN narrows the larger spreads that are part of regular brokerages.
- ECN offers traders the privacy they need to conduct business.
So far, it sounds like ECN is something that all traders should be trying to get their hands on. But, like everything else, this system is not without its drawbacks.
Cons of trading with ECN
Using ECN costs a lot of money. The high toll is one of the most significant and glaring disadvantages of trade on these systems. For access to the system, traders must pay a fee. Traders have to pay a commission for every transaction. The point is that using ECN can also be expensive. This expense can lessen a trader’s profitability and bottom line.
Another downside that comes with using ECN is the interface. It is not as user-friendly as your traditional broker’s platform. There are no integrated charts that a regular broker will provide. Neither will you find the data a broker will supply. Without these, someone new to investing in forex will not find getting started with ECN easy.
ECN can make stop-loss settings and calculating break-even points more difficult.
So, while ECN offers great perks to traders, it does come with a few drawbacks. It is up to a trader to decide whether dealing with those drawbacks is worth the benefits that ECN offers.
Where to find ECN brokers
Are you interested in using an ECN model for trading on the forex market? The first thing you need to do is identify a platform that offers this kind of service. It is not always easy because there are many scammers posing as legitimate brokers.
Before you invest, do some research into the brokers you have in mind with whom you might consider doing trade. Unregulated brokers are a dime a dozen and may offer some attractive perks. But, they do not offer ECN accounts, even if they may claim to do so. Only regulated brokers will have this type of system in place.
Remember who the liquidity providers of ECN accounts are – banks, hedge funds, and the like. How likely is it for these institutions to use unregulated brokers?
What I’m saying is to find an ECN, you need to check the regulation status of the broker with whom you plan to trade.
An ECN broker will also advertise the following services.
- Automatic matches of trade orders for selling and for buying using ECN.
- Linking traders and liquidity providers without using a DD (dealing desk) bridge.
- Direct execution of processes between parties
- Fixed commissions
- No middlemen
Brokers who offer ECN models
Every online forex broker will tell you that they are the best and offer the best services, which is not always the truth. The best way to find the best forex brokers is by hunting for honest reviews. A bit of hands-on experience will also go a long way in shaping the truth to a trader.
In the previous section, I mentioned that regulated brokers are the ones who can offer ECN accounts. Here we want to take a look at some regulated brokers who offer this type of service without jumping into the hype of who is the best. We are here only to present the facts.
That said, new traders should shop around to find a forex broker who meets their trading needs. Some forex brokers will start you off with modest deposits. Others are for traders with deeper pockets. One broker might be keen on using risky strategies while another is moderate or plays it safe. Decide what kind of trader you want to be with a little bit of practice before committing to anything.
Roboforex offers its clients a low-risk environment to trade. That’s because it is registered with the European CySEC, making it a regulated company. Using Roboforex is a safe and reliable way for traders to participate in the forex market.
The company does have ECN trading accounts. Those accounts are in the classic MetaTrader 4 setup. They also have the advanced MetaTrader 5 platform and offer accounts in R MobileTrader and R WebTrader.
Traders can choose the trading experience they want to have.
- Desktop terminal
- Mobile app
- Web browser
Using any of these means to open a trading account is easy with Roboforex.
VantageFX is another regulated broker that offers ECN trading options. Its regulated status makes it a safe and reliable way to conduct trade on the foreign exchange market. Like Roboforex, this company ranks up there with the top MetaTrader brokers 2021 has to offer.
VantageFX has a Raw ECN account created with one purpose – promoting transparency.
VantageFX ECN accounts have a standard fixed commission of $3.00.
Frequently asked questions
Getting used to the terms and processes that make the forex market run can take a bit of time. Here, we want to answer questions that pop up all the time on using ECN systems.
What is ECN in finance?
ECN in finance is just what we’ve said it is. It is a computerized system that makes dealing on the foreign exchange market possible after trading hours. It removes the middleman by linking liquidity providers with traders.
What is ECN and STP?
Earlier, we mentioned that there are different types of brokers. STP is one of them. Like ECN, STP is also an abbreviation. It stands for Straight Through Processing. What does this mean?
STP is a Forex brokerage approach. Using this method, client orders get sent to the market directly. These orders do not go through dealing desks.
An ECN account is also a type of non-dealing desk affair. It allows traders to do real-time business by giving orders directly on the market.
ECN vs STP which is the better option?
To answer this question, we must take a look at how these two systems work. STP technology and ECN are both non-desk dealing forex trade models. They both offer ease of execution and lower the overall cost of doing business on the foreign exchange market. But the main thing that sets them apart from each other is routing.
ECN account traders pay a set commission for opening trades and closing trades. But STP accounts charge no commission.
STP adds a markup to the liquidity spread.
But, whether ECN or STP is the better option is a matter of personal preference.
What does dealing desk mean?
We’ve mentioned desk dealing a few times in the text, but what does it entail? Dealing Desks are the places market makers use to execute orders on behalf of their clients. The market makers are the third-party involvement that ECN or STP models eliminate.
Do all regulated brokers have ECN for trading
We mentioned earlier that only a regulated broker would have the means to support ECN trading. Yet, not all regulated brokers have this option available. One such online broker is Capital.com. This company works with desk dealing. They are market makers or the third party involved in the trading process.
ECN or market makers which is better
It is all a matter of opinion or personal preference. Generally, it takes a higher financial entry requirement to trade on an ECN platform. VantageFX, for example, gives ECN to traders that start at $500 but it has a low $3.00 fixed commission.
Capital.com, on the other hand, has a low financial entry requirement of $20. All fees associated with trading on this platform are clear. Nothing remains hidden, including the high CFD fees. On some brokerage sites, the breakdown of these fees might be explained in a way that makes it difficult to understand. We want to simplify them for you.
These are some of the fees you can expect to pay.
- Custody fees
- Conversion fees
- Inactivity fees
A lot of market makers are like Capital.com, which offers low start-up costs. They also provide incentives for you to invest. For example, you may not have to pay any commission for three months or something like that. After that period, you begin to pay a commission for each share, unlike ECN.
ECN has a fixed rate or calculates a fee when a buy order or sell order removes liquidity.
Then, you have to pay the custody fee to the broker for babysitting your investment. It’s a lot more nuanced than that but a custodian looks after the money you put in to trade. The fee will be different based on the company you invest with, the type of account you have, and the services offered.
The conversion fee is the money charged for converting one country’s currency into that of another country’s. The cost of the conversion fee is fluid and fluctuates with the market. A currency with a high demand means the conversion fee is higher. When that currency is weak, the conversion fee is lower. Weak or strong, you will have to pay this money.
Last on our least is the inactivity fee, which speaks for itself. If there is no active trade happening on your account, then it goes inactive after a period of time. How long that period is depends on the company you trade with. How much the inactivity fee is also depends on the firm.
There are also hybrid systems that are both ECN or STP and market makers. Vantage Fx is one platform that offers this system.
Concluding thoughts on what is ECN
Being able to assess trading data patterns is a valuable skill to have when dealing on the forex market. Every trader should learn how to read these patterns. One of the best ways to do that is
by making a clear separation between emotions and trading decisions. But developing technical evaluation techniques is not something everyone can do. Not everyone is good and abanding emotions altogether. That’s where systems like ECN comes into play. By trading using ECN, you do need to depend on gut feelings.
ECN and systems like it identify and produce buy indicators and sell indicators by reading trading data patterns for you. They help traders find new opportunities to trade and there is no gut feeling or emotions involved. It works with ones and zeros and bottom lines.
Technology used for forex trading has improved by leaps and bounds. Fifteen years ago, traders did not have a way to speed up access to data points. Now systems like ECN are available. They give every trader an equal opportunity to trade on the internet and to be successful at it. But, they are not without their drawbacks.
Consider the pros of using this system. Weigh them against the cons. Then a trader, especially newbies, can make an informed decision to know if ECN is right for them. One of the best methods of succeeding at forex trade is with a good understanding of all the ways you can work the market.