ECN is an acronym for Electronic Communication Network and ecn forex brokers are rapidly becoming the most popular form of on-line forex trading for a variety of reasons. Key among these is the increased reliability and transparency of these ecn forex brokers.
As forex ECN brokers don’t have dealing desks, this eliminates one of the most common problems faced with the more traditional on-line broker. Re-quotes. When a dealing desk broker can’t place a client’s order into the markets at a profit, the broker will typically re-quote the price repeatedly until the order can be closed at a profit. At a profit for the broker that is – not the client.
ECN Forex Brokers do NOT employ dealing desks. That means your trades go directly to the market and there is no dealer manipulation. Using an ecn forex broker gives you access to much tighter Interbank level spreads, leaving you with a much higher chance of successful trades.
Having no dealing desk means ecn brokers don’t have any risk to offset or hedge, so there is no reason to re-quote on client’s orders. True ECN forex brokers work on a fixed fee per traded lot so there is no down-side on profitable orders. With a traditional dealing desk broker, your losses are the broker’s gain. Vice versa, make profits and the dealing desk broker loses money. How long do you think that would be allowed to go on?
The more advanced ECN forex brokers also use a price engine known as an Aggregation Engine. This price aggregation engine scans the various Bid and Ask prices from the liquidity providers in the broker’s pool and matches the best Bid to the best Ask price to display the best price combination to the traders using the particular ECN broker.
ECN Forex Brokers Features
- Does your ecn forex broker offer MT4? If Yes, keep in mind MT4 does NOT support ecn forex trading. It needs a bridge to operate in an ecn environment properly.
- Does your ecn forex broker offer a price aggregation engine? Take care here as ecn forex brokers must by the nature of ecn offer price aggregation.
- Not all ecn forex brokers are created equal. One of the most vital elements will have to do with their execution speed. Check your broker’s execution speed.
ECN forex brokers make the prices clients trade on much closer to the real available Interbank prices. As the name implies, these Interbank prices are only available to institutional investors trading millions of dollars per transaction. Interbank spreads for retail clients have only recently become available and the typical ecn broker would ask for very high opening account balances, usually several thousand dollars.
ECN forex brokers offering low account opening requirements were virtually unheard of until recently. FXCC is one of the ecn forex brokers offering some of the lowest account opening minimums. A mere $500 will get you trading an account with one of the best ecn forex brokers packages available on-line today.
The best ecn forex brokers will also offer multiple trading platforms for their clients. These are specialised platforms aimed particularly at the ecn forex environment. There is one small problem here however and that is the incompatibility of established forex platforms like MetaTrader 4 to handle true ecn forex trading.
Many ecn forex brokers who offer MetaTrader 4, get around this by incompatibility by adding a “manual” step to a client’s trades. This manual step is essentially the addition of an extra fee. The broker gets the price for the EUR/USD for example from his liquidity providers, adds an additional mark-up to this price and then quotes his client.
The best ecn forex brokers however use a bridge technology which makes the transmission and receipt of orders between the client and the price providers automatic, without the need for any additional fee for this service.
ECN forex trading is about transparency, low spreads and speed of execution. The lack of a dealing desk eliminates the conflict of interest inherent in traditional market maker brokers and eliminates the practice of price manipulation.
The best ecn forex brokers only ever make a fee per lot traded by their clients. The more lots the client trades, the more fees the ecn forex broker makes. For the best ecn forex brokers, their long-term profitability comes from profitable clients. The more successful your trading is, the more lots you will be trading, the more fees your ecn forex broker generates.
Rating ECN Forex Brokers
From experience, I know what to look for when it comes to choosing the best ecn forex brokers. I’ve been doing this long enough not to be fooled by any of the hype any more and I base my decisions on the experience I’ve gained over the years.
Here is my check-list of things to look for in ecn forex brokers:
- Variable spreads – ecn forex brokers transmit orders directly to the markets. These markets vary so the spreads ecn forex brokers offer reflect this variation.
- MT4 bridge – I can’t stress this one enough. ECN forex brokers that offer their clients the MT4 platform MUST offer an ecn bridge. MT4 does NOT support ecn in its base form.
- Price Aggregation – orders transmitted via ecn forex brokers go to the broker’s liquidity providers. There the orders are matched against the available liquidity. This needs price aggregation to match the best Bid/Ask price levels.