ECN Brokers – Better or Worse than a “Regular” Broker?
ECN Brokers are brokers who use an Electronic Communications Network to provide price quotations and trading opportunities to their clients. The best way to picture an ECN is as an Exchange. Through an ECN, the broker puts various market participants into touch, directly. What that means is that it matches up trades so a seller will always find a buyer and vice-versa.
By acting as an exchange, and by consolidating price quotations from scores of market participants, the ECN broker is able to offer its clients much more attractive bid/ask spreads than its “traditional” peers.
The fact however remains that the broker needs to make money as well. An ECN brokerage achieves this goal through a fixed commission charged on every transaction.
Is an ECN approach preferable to the “traditional” one from the perspective of the trader then? The setup does indeed have its advantages.
Because it works as an exchange, it completely eliminates the possibility of the broker acting as a market maker. This issue is not one to be taken lightly either: a market making broker trades against its own clients on a playing field the rules of which it itself sets.
Such a setup is indeed inherently unfair towards the trader, on account of the obvious conflict of interest involved. There are scores of shady brokers out there who claim to be ECN brokers, while being market makers. The community is usually quick to catch on to such antics though, and such fake ECN brokers are exposed through community forums/message boards.
Another advantage of trading with an ECN broker resides in the better spreads and smaller fees involved.
On top of all that, ECN trading is available as long as there are traders willing to trade, which is pretty much round-the-clock.
Users who require a certain degree of anonymity in regards to their trading activity will likely also opt for ECN-based trading.
Price transparency is another one of the advantages offered by ECN brokers. All brokers have access to the same data feed and the same prices and there’s some price history available as well.
No individual trader enjoys any kind of advantage over another, in any shape or form.
How does an ECN work?
The network exists for the sole purpose of bringing Buy and Sell orders together. To this end, it offers its users access to the information pertaining to the entering of trading orders. Whenever there is a lack of information concerning order-specifics, the network displays the best bid/ask prices available on the open market.
Does an ECN have any disadvantages?
Access to an ECN network is not cheap. There are all sorts of fees levied on users and to small-timers, the commissions may seem steep too. They are especially frustrating as they affect long-term profitability.
Overall, it is safe to say that for serious, high volume traders, the advantages offered by an ECN broker far outweigh the disadvantages. The legitimacy angle alone is probably well worth the extra costs for such traders.
Here’s our list of ECN brokers.
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