Looking for Tighter Bid/Ask Spreads? Read our Helpful ECN Forex Brokers Guide
In the early years of online Forex trading there was very little choice when it came to choosing a broker. Market makers or dealing desk brokers made up the majority, and for many traders these brought the fear of a conflict of interest. Today, there is far more regulation to keep this kind of practise in check, but there are also a number of other different types of broker to choose from if a market maker doesn’t offer what you require or need. We’ve been looking at some of the best ECN Forex brokers currently operating in the industry and you can read what we think about them in our Forex reviews. But here we’re going to be looking at the idea of choosing a Forex broker, explaining how they work and the benefits you can expect to enjoy if you choose one.
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What does ECN actually mean?
The initials ECN stand for Electronic Communication Network, and it is becoming a very popular way for traders to participate in foreign currency trading. ECN brokers make use of a network and provide a place where traders can compete on an equal footing. Using a network means that the trading of financial products can be done outside of a traditional exchange. When orders are entered or placed with an ECN broker they are made available to a range of third parties and are available for execution in part or in full. We’ve given the impression that ECN trading is a relatively new idea but the first electronic communication network was created in 1969. However, it wasn’t until 1999 that they were first used for online currency trading, and it is really only recently that their popularity has increased.
Top ECN Forex brokers – What do they do?
The best ECN Forex brokers provide market makers and traders with a place to compete with other to make winning trades, and act as a bridge between market participants and tier 1 liquidity providers such as major banks. The link is provided with the help of a very exceptional piece of technology known as Financial Exchange Protocol (FIX Protocol). The ECN broker is at one end of the bridge where it is in contact with liquidity providers and also at the other end of the bridge where it is in contact with its own clients, all with the help of technology. An ECN broker doesn’t generally make any money via a fixed spread as currency prices in this arena are constantly changing and there is no control over the bid/ask spread. Often they do offer variable spreads, but it also likely there will be a commission charge levied per transaction.
ECN trading brings a number of advantages for the retail Forex trader
ECN trading has become a very popular way to trade foreign currencies and this is possibly because there are a number of advantages for the retail Forex trader. Want to know what they are? Keep reading, and we’ll share them so you can decide whether the best ECN Forex broker is going to be right for you.
- Participants are nameless – Privacy and security are important for Forex traders and this is possible with the help of an ECN broker who is only acting as a middle man. All trades made via an ECN network are indistinguishable and there is no way in which a trader can trace another person’s trades.
- Efficient trade execution – There are fewer participants in ECN trading which means trades can take place in a much more efficient way. The improved speed of execution is possible because traders aren’t dealing direct with a broker but are using their network to make trades. An ECN FX broker doesn’t actually execute any trades but matches market participants. This means there is no conflict of interest and trades can be executed very swiftly and efficiently.
- Variable spreads – An ECN broker only ever offers variable spreads as there is no way for them to control the bid/ask spread. For many traders this will be the reason why they choose to trade in such a way. Because they are being given direct access to market prices, which fluctuate as a result of supply and demand, volatility of the market and other contributory conditions. Trading on real market prices means the spreads are much tighter on all major currency pairs during normal market conditions.
- Trading is continuous – Trading takes place continuously with an ECN, even when there is significant news and events. Which means price volatility is increased, offering the opportunity to make more profitable trades.
The downside of ECN trading
As you might expect there are a few disadvantages associated with ECN trading.
- ECN trading can be expensive – ECN Forex brokers generally charge commission on any trades, rather than making money via the spread. For many traders this can be a big disadvantage, especially if planning to trade in high volumes. However, if you are planning to start with a relatively small volume of trades this is an excellent way to keep costs to a minimum.
- The opportunity to influence the market – It is possible for traders to influence the market by making high volume trades, and because of the inherent anonymity it is almost impossible to find out who is doing it.
- Not all ECN brokers are the genuine article – When you’re looking for the best ECN broker you may come across one who says they are a true ECN broker but in actual fact they are not. But don’t worry, because it is relatively easy to spot the wolf in sheep’s clothing.
How to tell whether an ECN broker is genuine
It is easy to spot a true ECN broker. There are a number of things to look out for.
- True ECN Forex brokers only ever offer variable spreads.
- A true ECN broker never uses a dealing desk. It might not mention a dealing desk in a broker’s website but there is an easy way to tell if you open a demo account and a real account and look at the pip difference and whether prices vary much during news and events.
- True ECN brokers allow day traders and scalpers and put no restriction on stop loss and take profit distance.
- There should be no restriction in the number of lots placed.
- A broker only giving negative slippage is not a true ECN broker.
- A true ECN broker will keep their clients well informed with pricing updates as and when they happen.
How to pick a top ECN forex broker
Whatever type of broker you choose it is important to pick the best one possible, both for you and the way in which you plan to trade. There are plenty of brokers to choose from but they are in no way equal. You will be able to increase your chance of success if you pick an ECN Forex broker that best fits your needs as well as being safe. And there are a number of factors to consider before you make your decision.
First and foremost, you should be looking for a broker that is licensed and regulated by a recognised regulatory body. A well respected body is the Financial Conduct Authority (FCA) in the UK. There is also CySEC in Cyprus, and BaFIN in Germany. Top ECN Forex brokers in the USA are generally regulated by CFTC and the NFA. When we write our reviews we will always mention this vital information, and check whether the broker’s licensing claims are true. You can also check out a broker’s license for yourself by visiting the regulatory body’s website. Choosing a licensed broker is the most sensible course of action because you can be sure the broker has enough capital to cover any trading losses. It is also normal for clients funds to be kept in segregated accounts, and the broker will provide fair and honest trading, executing orders at prevailing market prices. Most developed countries regulate Forex trading very well, but standards do vary. It is also possible for a broker to be licensed and regulated by more than one regulatory body.
If you’ve chosen to use an ECN Forex broker then as long as they are a true ECN broker you can be pretty sure this is going to be good.
Opening an account with any type of Forex broker will mean sharing some very personal information, including financial details. In order to complete the account opening process you may be required to download certain documents, such as a passport, driving licence or personal identification, as well as sharing your bank account information in order to make payments. Therefore, you need to be absolutely certain all this data is going to be kept safe and secure and there is no possibility of it getting stolen. The top ECN Forex brokers use SSL (Secure Sockets Layer) encryption that makes certain your data can’t fall into the wrong hands. An ideal level would be to choose a broker offering at the very least 256-bit SSL encryption. You might also want to check the small print to ensure your details aren’t going to be shared or sold to a third party, as this seems to have become common practise in the business world in general.
Fees, spreads and commissions
These can vary considerably from broker to broker, and it is important to understand how much a broker is going to charge for their services. The cost of trading can significantly impact on your profits. A pip here and there might not seem like a lot but for high volume traders it can add up to a significant amount. But it’s important to remember that while a broker may be offering a low cost service you really should consider a broker that makes slightly higher charges. In the Forex world you get the service you pay for and while a broker may charge a little more you can be sure they will offer a far better service which in the long run is going to be much better. Top ECN Forex brokers will offer a number of useful extras such as training material, 24 hours customer service and support, research and market analysis tools, and a user-friendly platform.
There are a number of other factors to bear in mind such as availability of Social Trading, types of account, trading styles supported, demo accounts, trading tools and trading platforms.
If you’ve been wondering whether an ECN Forex broker is the right choice for you we should have given you enough information to make a more informed decision. If you’re still a little reticent the read some of our ECN broker reviews.