What Is An ECN Broker?

An ECN broker, is any brokerage that uses an electronic communication network to give it’s clients direct access to other participants in the Foreign exchange market. The Foreign exchange market is an over-the-counter inter-bank market with no centralized exchange, the ECN basically plays the role of a middle man. The broker collects Bid/Ask prices from the different market participants, and then matches their customers orders with the best quoted price. Different ECN brokerages gather their quotes from various sources, meaning that spreads can vary between different ECN brokers.

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ECN Model

Advantages to using an ECN Broker

An ECN brokerage gathers quotes from several different sources, this means spreads with ECN brokerages are often considerably tighter. Typically Foreign exchange brokerages make their money off the spread with all costs being included within the spread, ECN brokerages however make their money by charging commission to their clients. While the commission does an extra cost, such brokerages still tend to offer better value for money overall.

ECN brokerages only matches traders with various liquidity providers, meaning that the interest of the customer and the brokerage are aligned. As the brokerage makes money regardless of whether the trader is successful or not, there is no reason for the brokerage to engage in any unscrupulous activity in order to maximize profits. For instance a genuine ECN brokerage will never be found to be trading against their clients.

Again due to the fact that ECN’s make money off commission, they rarely place limitations on the kind of trading activity that clients can undertake allowing both hedging, trailing stops, and unlimited scalping.  This means that many traders feel much happier trading with an ECN brokerage.

Disadvantages to using an ECN Broker

ECN brokerages do have some disadvantages, for instance many ECN brokerages have much higher minimum deposit requirements. Which means some traders may not be able to open an ECN account at the brokerage of their choice, however their are a number of ECN brokerages which cater to clients who have limited capital at their disposal. Another minor gripe some traders have with ECN brokerages is that it can be more difficult to work out stop-losses and break even points in advance. Due to the variable spreads on offer, however many market makers also offer variable spreads.

Conclusion 

Using a brokerage which operates under the ECN model offers a trader a number of advantages. This is not to say that their aren’t perfectly good market makers out there. Those serious about trading and who have the funds to open a ECN account should seriously consider doing so.

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