ECN Brokers- Meaning and Advantages

January 3, 2023
ECN Brokers

ECN brokers are the type of foreign exchange brokerage that use an electronic communication network that matches buyers’ and sellers’ trading orders in the financial market.

What is an ECN Broker?

An ECN broker is a financial intermediary that acts as a link between the trader and the market and gives direct access to market liquidity. These brokers use an electronic communication network that matches the buy and sell orders to trade the market. ECN brokers are non-dealing desk brokers that don’t involve market makers and directly pass the trading order to the market liquidity providers. Direct access to the market liquidity allows high-speed execution speed and lowers the trading fees, by offering tighter spreads and low commissions. It comes as no surprise therefore that most traders prefer using ECN brokers for trading.

How ECN Brokers Work:

The ECN is an electronic system that allows traders to execute their trades by providing information on trading orders. This electronic system is designed to match the buyers and the sellers and offers the best market prices to initiate the trade. When the exact market prices are not available a list of the lowest bid and highest ask prices is shown on an open market. This is how ECN brokers are able to offer lowest spreads to the traders, which are very beneficial for trading strategies like scalping.

Features of ECN brokers:

  1. Tight spreads and Low trading costs: An ECN broker executes the trader’s trades on an electronic system and there is no involvement of the third party like market makers. This lowers the trading costs and high liquidity access tightens the spreads on a currency pair. However, most ECN brokers charge fixed commissions, despite which ECN brokers turn out to be more cost-effective for the traders.
  2. Transparency: Live price feeds are shown on the platform if the exact prices mentioned by the trader don’t match the market price. A list of the lowest bid and highest ask prices are shown and traders can choose their preferred price to execute the trade.
  3. High execution speed: ECN brokers work electronically allowing traders to trade directly without any dealing desk or need of requotes, which increases the execution speed of the trade. High execution of the trades allows traders to make efficient trades that use complex trading strategies and are time-sensitive strategies e.g., news trading strategy or scalping.
  4. Low latency: Latency refers to the delay in the time of the execution of the trade from when the trade is placed. In markets like forex, even a delay in seconds can change the ask and bid prices drastically. High latency can result in slippage which means that the price entered by the trader is different from the actual market price. This is where ECN brokers have an edge as they offer instant filling of orders, with minimal slippage or lags.
  5. ECN brokers do not trade against the traders: An ECN broker matches the trades between the market participants, so an ECN broker cannot trade against their clients. ECN trading model ensures no conflict of interest as normally ECN brokers charge fixed commissions even if the trader losses.

For Whom ECN Brokers are Beneficial?

ECN Brokers are great for trader trading using complex trading strategies like high-frequency trading strategies or while trading CFDs. Timing is everything in CFD trading as small changes in the market can lead to drastic differences in profits and losses. ECN brokers offer high execution speed making it possible to execute the trades faster and more efficiently.

There are a number of ECN brokers in the market and not all are reliable. It is important that the trader do their own research and pick the right ECN broker.

Author Amsterdam