What is an ECN (Electronic Communication Network) broker?

The quick definition is that ECN (Electronic Communication Network) brokers allow traders to place competing bids against each other. They are NDD (No Dealing Desk) brokers, which means that instead of passing orders to market makers who take the opposite position of a trade, they directly connect buyers and sellers. When they cannot match two counterparties, they offer the highest bid price and the lowest ask price on the open market.

ECN forex brokers are a major source of liquidity for retail traders compared to major market makers such as large banks, hedge funds and other financial institutions. Globally, they're the fastest growing brokers and they're particularly popular for currency trading as they offer greater transparency to investors.

ECN brokers vs STP brokers

ECN brokers are very similar to STP (Straight Through Processing) brokers. Neither of them have a dealing desk. Listed trades are routed to the broker's group of liquidity providers, such as hedge funds, major banks and investors. These providers act as counterparties for each transaction and compete with each other to obtain the best spreads between supply and demand. The broker effectively acts as a silent facilitator, connecting the trader to their internal liquidity pool while taking a small commission via a spread increase.

The main difference between ECN and STP brokers is routing. While the STP broker provides access to different providers in its liquidity pool, the ECN broker acts as a hub. The hub essentially acts as the primary source of liquidity, made up of the various hedge funds, banks and market participants. The other notable difference is the size of the positions. ECN brokers generally cap the minimum position size at 0.1 lot. This is because few liquidity providers are able to support smaller position sizes, which can be difficult for beginners.

Both the ECN and STP models offer fast trade executions and tight spreads that lend themselves to a range of strategies such as scalping. In fact, many ECN, STP and hybrid brokers offer zero-pip forex spreads, although they may charge a fixed commission per lot.

Benefits of ECN brokers:

Trading via an ECN has several advantages:

• Execution Speed ??- Pure ECN forex brokers such as Pepperstone and FxOpen connect you directly to liquidity providers, ensuring direct market access and faster trade executions.
• Transparency - ECN brokers prevent price manipulation because everyone uses the same feed and trades at a set price. No investor has an edge over other traders with the ECN system.
• Trading hours - ECN brokers usually allow you to trade outside of traditional trading hours, allowing investors to react to news announcements after the market, for example.
• Leverage - The best ECN brokers usually offer leveraged forex trading. The ratios vary depending on your jurisdiction, but it is not uncommon to find leverage levels as high as 1:300.
• Scalping - Fast order execution and tight spreads enable ECN brokers to allow high-volume scalping strategies. However, you should check the broker's rules regarding scalping before depositing funds.
• Regulation - ECN brokers are heavily regulated. This is especially important given the growing number of online forex scams. The best ECN brokers are regulated and comply with local laws and measures.

Disadvantages of ECN brokers

The following are the drawbacks of trading with an ECN broker:

• Commissions - Forex commissions charged by most ECN brokers usually vary from $2.50 - $5.00 per lot. Commissions tend to be higher than for the trading of CFDs or stocks, and they're usually higher than non-ECN brokers. This suggests that ECN brokers are less ideal for low-volume traders or those with micro accounts.
• Volatility - Currency markets are vulnerable to sudden increases in variable spreads, especially during high market volatility. It's therefore key that traders use appropriate risk management tools.
• Deposits - The best ECN brokers generally require higher opening deposits than standard trading accounts. This is because ECN brokers often shift responsibility to the trader for meeting market liquidity requirements. This is the opposite of a market maker broker who can step in to provide liquidity on behalf of the trader, and therefore can offer lower minimum deposits.

Conclusion

ECN brokers offer many benefits to currency traders. High levels of market transparency mean price manipulation is not possible. However, you should still look for regulated ECN brokers. Leverage levels, commissions and trading tools are also key to consider when opening a live account with an ECN broker.

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