Electronic Communication Network (ECN) is a term coined by financial pundits to refer to a computer platform that allows traders to trade without directly interacting with the forex trade floor. It helps by automatically matching buy and sell orders at specified prices. ECN forex trading also ensures that major brokerages and individual traders get a common platform for trade without a mediator.
ECN Forex Broker vs Forex Market Maker
Forex is an unregulated market body. The bid/ask spread of currency pairs can vary from broker to broker. Forex market makers establish the marketplace for the trader. The spread on a currency pair, however, depends on the broker actually managing the market maker. Prices here rarely match the actual market standings. For example, if Interbank gives a pip spread of 2 on USD/JPY, then a market maker might display a spread of 3 pips on the same currency pair for its traders. Getting a fair deal here is almost impossible.
ECN forex brokers, on the other hand, also create a market of sorts but without the drawbacks of a market maker. They map every order to the best price possible. Such prices are taken directly from Interbank charts or individual traders. The bid/ask spread is not manually altered. ECN forex brokers can make money by either:
- Charging a small fee on every successful transaction.
- Taking subscription fees from traders who use their services.
Benefits of ECN Forex Trading
Trading through an ECN forex broker has several benefits, such as:
A trader trading through an ECN forex broker can open a trade with liquidity provider M and close it with liquidity provider S or he can have the whole trade completed with a trade of another trader.
It is possible to get tighter spreads than anywhere else due to the presence of a huge number of marketplace participants.
It is possible to get the best bid/ask price due to multiple sources.
Unlike normal broker behavior, ECN forex brokers will never bid against a trader’s transaction, as they have nothing to gain out of it.
Every trader gets to create theirs on bid/ask price for the currencies they hold.
Despite all these benefits, ECN forex trading is still plagued by several drawbacks. Such platforms almost never provide news and charts of the market trends. But if you can manage the analysis from some other source, then an ECN forex broker could prove very profitable for you.