An ECN broker can be defined as a foreign exchange brokerage that takes the help of an Electronic Communications Network or ECN to build a connection between the buy and sell orders that are carried out in the currency exchange trading market.
It is a computerized trading system that matches multiple orders executed between buyers and sellers operating in the forex market in an automated manner. Since most of the operations are carried out by machines, you can expect a certain degree of accuracy.
The ECN also provides you with the prevalent buy and sell prices or quotes that offer you a glimpse of the highest bid price and minimum offer price in the market for each of the many forex trading pairs available out there.
Trading pairs, as one would know, comprise one particular currency valued against another currency. The trading pair EUR/USD, for instance, reflects the euro’s value with regard to the U.S. dollar.
In terms of dollar volume traded, the forex market could be described as the biggest financial market across the globe. Forex trading is carried out very differently from how stocks and other commodities are traded. The trading activities are carried out in an over-the-counter market. This is the same market in which buyers connect with sellers.
What Are The Characteristics an ECN Broker Ought To Have?
There are certain characteristics that help one distinguish between an ECN broker and a traditional broker. If you are already aware of these characteristics, you can find out how well an ECN broker is doing their job.
- ECN brokers do not assume the responsibility of moving the slate of orders to those who are in charge of the market or the market makers. They perform the task of matching the participants using electronic methods in a trade and then, transfer the order to the various intermediaries operating in the securities markets.
- An ECN broker executes a variety of trades over the electronic communications network for potential investors. Owing to the manner in which ECN is designed, working with ECN brokers helps one in saving up on both time and effort.
- There are certain limitations or restrictions an ECN broker has to adhere to. An ECN broker, for instance, is prohibited from trading against their own clients as it leads to transactions being matched among market participants. ECN brokers are liable to charge a pre-decided commission for each transaction they carry out for their clients.
How ECN Brokers Are Different From Dealing Desk Brokers?
A lot of traders often get confused between an ECN broker and a dealing desk broker.it is important to know that ECN brokers are found to be much more qualified than dealing desk brokers. One of the reasons behind it is the fact that the ECN offers a direct and seamless connection between buyers and sellers.
Dealing desk brokers, on the other hand, carry out trades using a completely different method. They either get a client to make the purchases or they reach out to a client who would want to place a sell order and sell to them.
Though dealing desk brokers are quite popular today, they are criticised for two important reasons. Since they move in an opposite direction from trade, they end up making counter investments to the kind of investments their clients have made. Many issues crop up because of this.
If a dealing desk broker is transferring an order to a market maker, the order gets executed at a very slow pace. This leads to the orders of the clients being billed at much lower prices. To be more relevant, dealing desk brokers have to work towards resolving these issues.
Benefits Offered by an ECN Broker
A forex trader, while working with an ECN broker, can expect to receiveseveral perks and benefits. The number of benefits you receive is also dependent on the broker you choose and how they operate.
Here are some of the most important benefits offered by an ECN broker:
Bid and Spreads
When you go around purchasing or selling financial assets, you will realise there is a spread differential between the highest buying and selling prices. The best available selling price, referred to as the ‘ask’, has to be paid by the buyer. The best available buying price, called the ‘bid’, is what a seller would be taking.
Since an ECN has the bandwidth to match the traders’ orders with the most lucrative buying and selling prices after analyzing all the participants at a given point of time in a forex market, it leads to lower bid-ask spreads.
What this means is that a trader will have the chance to enter or pull out of positions in the market at prices better than what a dealing desk broker would offer them. Dealing desk brokers mostly provide very high bid and ask spreads because they earn most of their money by keeping aside a portion of the resources for themselves.
Flat Commission Rate
Many types of brokers, including those who identify themselves as dealing desk brokers, ask for a percentage of the bid-ask spread. This is one of the reasons why several traders, especially those who have just started trading, are wary of working with them.
If you do not wish for money from the bid-ask spread to go to your broker, you should opt for an ECN broker. They work in a manner that proves to be beneficial for most traders. Most ECN brokers charge a flat commission rate on the trades they execute for their clients.
When you work with an ECN broker, there are a few important things you must keep in your mind. There are countless forex brokerage firms existing all across the globe. Many of these firms are not regulated by the government or financial authorities. You have to ensure the ECN broker you are dealing with is registered with some organization and has your best interests in mind download mt4.