Pros and Cons of an ECN Forex Broker

Starting Forex trading not be as complicated as you thought. As the most liquid market in the world, the daily trading volume of the Forex market reached $7.5 trillion last year. This is a large market and one of the better markets for novice investors. However, newcomers to the sector may wonder when they see financial service providers calling themselves ECN Forex Broker and offering ECN accounts - what exactly is the ECN?

What Is ECN？

The large Forex market has no centralized exchange, and FX investors can not make transactions in the stock exchanges like stock investors. In other words, tradings on Forex are over-the-counter transactions. How to realize the trades? ECN gives investors opportunities directly entering the Forex market.

ECN, also called Electronic Communication Network, is essentially a computerized electronic trading network system. This trading system, created for Forex and stock clients, allows market participants to trade currencies without having to go through a traditional exchange.

This electronic trading system utilizes sophisticated network and computer technology to match orders between retail FX investors and liquidity providers (banks, hedge funds, brokers, institutional investors, and other traders) for efficient trading.

The ECN system gives clients the opportunity to trade with each other in the market, i.e. order matching. After market participants place their orders (quotes), the ECN system sends the traders' orders anonymously directly to the market, open for all liquidity providers and other traders. Based on time and price, the optimal matching of deals is done fairly, and trades are executed automatically to obtain the most competitive market price.

This process is so efficient that traders, regardless of the size of their funds, can connect directly to other market participants, eliminating the need for "intermediaries" in trading. This is why ECNs are often compared to a bridge between traders and liquidity providers.

What Is an ECN Broker?

Investors may often see Forex service providers calling themselves STP or ECN brokers. What is the difference between the two?

Simply put, an ECN forex broker, a kind of No Dealing Desk (NDD) platform, utilizes the ECN system to execute trades without sending orders to market makers (MMs).

ECN brokers are the "centers" of this electronic trading system, providing investors with access to the ECN network. They use the MetaTrader 4 or MetaTrader 5 platforms to centralize and connect all market participants together as the sources of liquidity.

Unlike market makers, ECN brokers do not trade with their clients, nor do they trade on behalf of the clients to earn a spread. Such brokers charge a fixed commission, so the charged fee will be based on the number of trades, which is why they are preferred by some high-volume traders.

However, despite the advantages of ECN systems, they are expensive, so not every company can afford them.

Advantages of ECN Brokers

Investors are attracted to choose ECN Forex brokers by their unique advantages, the most significant of which include low spread, execution speed, and low costs, among others.

The ECN system minimizes the presence of intermediaries in order to provide lower transaction costs. Investors can still access the market even if it is not a standard market day.

There is a high degree of transparency and fairness in the ECN system. In this system, Forex brokers receive identical quotes, and historical prices are available, ensuring market transparency. While market prices are affected by market conditions, supply and demand, policies and other factors, the prices in the ECN system reflect the true market conditions.

The high level of transparency of the market is also facilitated by the fact that ECN brokers provide an order book showing the Depth of the Market, which allows investors to view the orders of other traders.

Various liquidity channels allow traders to get the best possible quotes, and the system's ordering by time and price provides investors with an optimal solution, combining the opinions of both buyers and sellers to facilitate the most favorable transactions. Orders are automatically matched and executed instantly, with no processing on the background or re-quotes, and are filled directly at the best price, transparently and quickly. This avoids price manipulation and increases competition between brokers and traders. By choosing the right ECN Forex brokers, the investor has the opportunity to buy and sell currencies at the price that is most favorable to him or her.

In addition, as previously mentioned, the orders that traders send to the market are anonymous, so ECN Forex brokers can also provide investors with a certain level of confidentiality. Those who execute large orders will prefer this advantage of ECN.

In addition, unlike market makers, who provide both liquidity and act as financial intermediaries, ECN brokers will not create situations that are unfavorable to retail investors and hedge against them for the broker’s benefit. A market maker's loss is a profit for the investor, while an investor's profit is a loss for the market maker. However, for ECN brokers, a trader's profit means the same to them, so they will not become the investor's rival, let alone stand against the investor.

While traditional brokers offer wide spreads, ECN accounts can often be traded with very low or even zero spreads, usually floating spreads. This type of forex brokers generally earns their profits by charging commissions, not spreads, so they don't manipulate spreads.

ECNs are more volatile, which may have advantages and disadvantages for different investors. For short-term traders, this is an advantage, and experienced traders may have the opportunity to make a good profit in a short period of time.

Short-term traders also choose ECNs because Forex trading strategies are not limited, and scalping is possible.

Disadvantages of ECN Brokers

Some people may wonder: if ECN has so many advantages, why doesn't everyone use it? This is because ECNs have some drawbacks and may not be suitable for all traders.

For new traders, the deposit threshold is one of the first things they may consider. In general, however, those who open an ECN account should have a deposit of $1000 to $2000, or even more. Investors exploring the Forex market are generally not likely to invest large sums of money in the early stages, so ECN's relatively high deposit fees may dissuade them from doing so.

The fact that ECN Forex brokers make money through commissions or other fees has a positive impact on the existence of low spreads but it does not mean that commission fees are cheap, nor does it mean that ECN brokers charge cheaper fees than other types of brokers, such as the STP.

Without carefully studying the commission rules of financial intermediaries, investors may find that commissions are more expensive than expected. And the fee may affect the final amount of your profit.

Changes in variable spreads make it difficult to calculate stop losses, and investors who place stop loss orders may not prefer ECNs because of the possibility of in-spread trading in this system.

Are ECN Brokers Good for Beginners?

Some people may think, "I have some experience in other investment markets, so isn't it enough for me to choose ECN, which is transparent and fair?" In fact, both traders who have gained experience in other markets and those who do not have any trading experience should consider their own situation before deciding whether or not to choose an ECN Forex Broker.

Investors should determine their budget and be clear about whether they can afford the risk of losing money. As mentioned earlier, ECN Forex traders set higher deposit fees and larger trading volumes than the STP brokers, so the risk is relatively higher for beginners who lack experience in investment and trading.

Investors with experience in other markets should not underestimate the complexity of the FX market, which is no less complex than stocks or futures. If you have not had good results in the stock market, you should be even more cautious with Forex!

Moreover, ECN brokers earn their profits through commissions, which, even if an investor has a flexible budget, can be more expensive than expected in the long run without planning.

Whether or not you should choose an ECN Forex broker also depends on your preferred trading strategy. For short-term and ultra-short-term traders, variable spreads may bring them huge gains in a short period of time. But long-term clients may not see the benefits that ECN offers.