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ECN Forex Brokers

When you are choosing between forex brokers, there are two basic types of broker: a broker who is giving you direct access to the forex markets through an Electronic Communications Network, and a broker who is “making the market,” that is the broker itself is involved in the transactions that take place on its platform.

ECN forex brokers offer distinct advantages for FX traders. However, there are also negative things that you need to be aware of when you’re choosing an ECN broker.

What Does “ECN” Mean, Exactly?

The acronym ECN stands for “Electronic Communications Network.” An Electronic Communications Network is a system that links together computers over a network.

In the case of the forex markets, other traders, including banks, are the nodes of that network. An ECN forex broker, then, facilitates direct interaction between one trader’s order and another trader’s order. The ECN forex broker provides a marketplace where all its participants trade against each other by submitting competing bids into the system.

Participants interact inside the system and get the best offers for their trades available at the time. All trading orders are matched between counter parties in real time. You put in a buy order, for example, at a price, and the forex broker puts that information out onto the network, and if someone grabs your offer at your price, bam, there’s your trade.

The ECN forex broker is a middleman that simply facilitates this transaction, as opposed to a market maker or dealing desk forex broker which is actually taking the other side of your trade.

The Number One Advantage of ECN Forex Brokers

ECN forex brokers often advertise themselves as “NDD forex brokers.” NDD stands for no dealing desk, and it’s true that the lack of a dealing desk can be a great thing for you as an FX trader.

The proof of exactly how great it can be to work with an ECN broker as opposed to a dealing desk broker is the fact that giant banks and hedge funds conduct forex trades over an ECN, rather than relying on the market created by any particular broker.

Why do banks and hedge funds like ECN NDD brokers so much?

The number one advantage is that the ECN broker allows banks and hedge funds to get tighter spreads and better pricing on individual trades. In forex, every pip counts, and when you’re using a dealing desk broker, you automatically start every trade two or three pips in the hole. ECN brokers, by contrast, can quote trades with spreads as low as 0.5 pips, so you can get into the money quickly when you get these better prices.

The ECN broker also provides banks and hedge funds with an anonymous trading environment. Dealing desk brokers can sometimes be gossip-ridden places where employees of the broker share information about what “big players” are doing today. Talk like that can corrupt a marketplace.

ECN brokers maintain client anonymity because they trade under the name of the broker. This gives an added layer of privacy to, say, the big bank that wants to unload GBP/USD, but not in a way that drives down the price of GBP/USD to an unappealing level.

ECN brokers also allow clients to see what’s called “volume depth.” That is, the ECN broker provides the client with information as to the bid and ask prices and sizes of other traders that are connected to the network. This way, traders can gauge the supply and demand available in real-time for a currency pair they may be considering trading.

Overall, though, the best thing about ECN brokers is better pricing in the form of lower spreads.

BUT—ECN Brokers Make You Pay

Naturally, there’s no such thing as a free lunch.

In this case, the price of the better pricing that ECN brokers provide is that ECN FX brokers charge commission for every trade you make. Usually this commission is manageable, but if you trade frequently, $4 to $6 per trade can add up fast.

Another disadvantage of using an ECN forex broker is that as an individual trader, you may be hard-pressed to find one that will let you have access to its network. Unless you have big dollars to deposit, this club may not want your kind.

Meanwhile, if you like fixed spreads, ECN brokers are not for you. They only offer variable spreads, moving with the market in a free-flowing manner.

Another potential disadvantage of ECN brokers is that that there are some online brokers out there who claim that they’re ECN brokers, but in reality they’re not. False advertising is entirely possible in the world of forex brokers because there’s no authoritative agency such as the SEC that regulates these brokers and their claims.

In the FX markets, caveat emptor is a Latin phrase you need to know the meaning of.

Beware of Dishonest Market Makers

Speaking of caveat emptor, no article about ECN forex brokers is complete without a thorough reinforcing of the idea why market maker forex brokers can be problematic.

When you are trading FX with a market maker broker, you must realize that the market maker frequently takes the opposite side of your trade and has the option to hold the position or offset it with other market participants. 

If a market maker opts to keep the trader’s position without offsetting it in the marketplace, the trader’s profit is the market maker’s loss and vice versa. Obviously, this can lead to a conflict of interest between the market maker and the trader (you).

Do not take this to mean that all market maker forex brokers are out to rip you off. That’s not it. But just remember that conflicts of interest are always a tricky proposition.

STP Brokers Are Not ECN Brokers, But Close To It

STP stands for “Straight Through Processing.” The STP broker is another broker that you’ll hear talk of when you investigate ECN brokers.

STP brokers send orders directly from clients to the liquidity providers. STP brokers may have several liquidity providers or may only have one that they’re partnered with.

Sometimes STP brokers are thought of as ECN, and do in fact function according to some of the same principles, but there is a slight distinction. ECN brokers display the depth of the market in a data window, showing clients order sizes and actual orders. STP brokers don’t provide that high level of transparency.

Nevertheless, STP forex brokers do give traders a way to execute trades immediately and directly without dealer intervention.

The Best ECN Forex Brokers

Here are three ECN forex brokers that we can recommend:

• Forex Club
• Interactive Brokers
• MB Trading

If you’re looking to get started with an ECN forex broker, these three are open to admitting you to their networks, and their networks are worth being a part of.

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