Electronic Communications Network brokers (ECN brokers) provide traders with the real time Depth of the Market (DOM) via a data window, by showing the entire bid and ask offers currently available in the market; be it from banks, hedge funds, market makers or individual investors. An ECN forex broker allows traders to see where their orders have been placed in the market and allows other traders to hit those orders; in other words via an ECN broker, traders can see where the liquidity is and execute trades.
In Forex trading, ECN brokers allow Forex traders to see with full transparency the trades that have been placed in by other Forex participants and as such are considered the purest breed of all forex brokers. The way in which an ECN broker displays such data is usually in a drop down box where the best bid and ask prices are included at the top of the box along with the contract/volume size for each. The ECN broker will also display other bid and ask prices, often the next 4/5 best bids and asks along with their volume/ contract size.
Due to the fact that ECN forex brokers will not be making profit from the spread as the raw available price is transacted when placing a bid or ask spread and evidently the fact that forex ECN brokers are not market makers, there is usually a small trading fee/ commission charged for each transaction. ECN brokers do not make profit from the spread or a trader’s loss but instead only on the commission that is charged per transaction. As such it is perceived to be in the ECN broker’s interest for its clients to be making profitable trades as this generally means that the more profit a client makes the more trades they will perform and with greater volumes.
ECN Brokers Vs STP Brokers
An STP broker is sometimes discussed to be an ECN broker, as they may have similar characteristics, however to be a true ECN broker you must display the depth of the market – something which STP brokers do not provide for. Additionally some STP brokers may offer fixed spreads and are compensated through a markup on the spread, where as an ECN broker will always have variable spread, as is evident from its transaction nature, and will not add any markup on the spread.
ECN brokers do not have a dealing desk which provides for full transparency, faster and better order fills and anonymity. The full transparency means that the ECN broker does not create an artificial market for the trader but instead that the ECN broker shows the trader and allows him to enter into the true market created by the various market participants. As there is full transparency in the market’s bid and ask spreads this provides more competitive offers to be placed in the hope of being executed first, which in turn provides lower and lower spreads for the traders.
Benefits of ECN Brokers
- Pros
- No additional spread is added – prices are ‘raw’
- ECN brokers provide full transparency of other market participants bid and ask prices
- ECN brokers make the same money whether a trader loses or wins – therefore not in ECN brokers interest for its clients to lose
- Variable spreads*
- ECN brokers means there is No Dealing Desk
- Anonymous trading and fast execution
- Orders, including limit orders, that are executed via an ECN broker may be sometimes fully or partially, depending on the volumes and availability of the bid and ask spreads, executed at a better price but never at a worse price than the one specified.
- Cons
- Commission is charged on trades
- At times of low liquidity the ECN broker spreads can be larger than that of a broker with fixed spreads
*Pro status may be subjective depending on Client’s preference