What is an ECN broker? – Is it a better choice?

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When it comes to choosing the best forex broker, the first thing you should pay attention is what kind of brokers exist. Brokers are generally divided into two large groups:

  • Dealers working on the principle of Dealing Desk, or DD.
  • Brokers operating on the principle of No Dealing Desk, or NDD. They, in turn, are divided into STP and ECN brokers.

Dealers like DD act as a counterparty to their customers, acting as a market maker. For brokers of the NDD type, the main function is to combine the applications of buyers and sellers without acting as a counterparty in client transactions.

In this article, we will review the kind of NDD broker that has been recognized by both professional and retail traders – the ECN broker.

Type of NDD broker – ECN broker

ECN (Electronic Communications Network) is an electronic communications network that automatically connects suppliers and consumers of financial liquidity. Combining transactions on the ECN network occurs directly, i.e. without intermediaries. Such an organization of trading allows market participants to gain access to more competitive quotes, narrow spreads and fast execution of orders.

ECN broker consolidates quotes from different market participants. Typically, such a broker has access to the liquidity of large banks, market makers and liquidity aggregators.

The main function of an ECN broker is to select and offer only the best bid and ask quotes for its clients. It works as follows: When a client sends an application to open a long position, any participant can react to it by offering their liquidity. Suppose there are 3 banks of a market maker willing to sell at prices of 1.2517, 1.2518 and 1.2519. In this situation, the client’s order will be executed at the best price, that is 1.2517.

This is how the ECN broker works – to collect suppliers and consumers of liquidity in one place and offer the client the best quote. 

When you are looking for best ECN FX brokers for traders rating plays an important role, like in other fields of life. If it has a negative review and low rating, then you should be careful having business with such a broker. 

However, ECN participants can be not only market makers and aggregators. Large hedge funds, retail traders who send their applications through prime brokers or aggregators also participate here. Thus, the list of participants in the ECN platform covers almost all categories of traders.

An ECN broker reduces transactions between market participants, but physically cannot trade against a client. 

By combining a large number of liquidity providers in one marketplace, an ECN broker can offer its clients very narrow bid-ask spreads. 

Since the spreads offered by ECN brokers are very narrow, and due to the high competition for quotes, the ECN broker cannot offer his spread premium in order to earn. Therefore, such brokers charge a fixed transaction fee from their customers.

Another feature of the work of ECN-sites is the ability to see the depth of the market – DOM (depth of market). The market depth reflects the nearest quotes filled with orders of buyers and sellers. 

Advantages of ECN 

Despite the fact that the process of executing transactions on ECN technologies looks rather cumbersome, the operation is very fast. Application processing speed is much higher.

Another nice bonus for users of ECN networks is the lack of requotes. The system does not offer the trader to open a deal at a different price. Often, orders are executed at the market price – the closest to the stated price. The difference between the market price and the bid price is usually minimal or none at all. This is achieved due to the high level of liquidity.

Liquidity

The ECN network includes large corporations and international institutions. Due to this, there is always liquidity on the market: some participants sell currency, while others need to buy it. Traders gain access to the very interbank market where external counterparties execute transactions.

Broker on one side with clients

At Forex, the ECN system allows the company to be on the same side with its customers. The broker does not buy or sell currency to traders; therefore, he is not interested in draining their deposits. An ECN broker does not receive income when its customers lose money.

Conclusion

ECN, or electronic communications network between market participants, was created to bring together buyers and sellers’ applications at the best prices and automatically. This organization of the trading process is by far the most successful, as it offers the trader a number of advantages related to access to information, competitive quotes and narrow spreads.