ECN trading, or trading through an Electronic Communications Network (ECN), is a platform that connects traders directly to interbank liquidity providers without the help of any dealing desk. Traditionally, Forex brokers used to follow the market maker model for many years, but with the introduction of new services and advanced platforms in FX trading, professional traders quickly started to realize the benefits of trading on an ECN platform.
ECN and direct market access are two important concepts in Forex trading that are considered to have no conflict of interest between a broker and its clients. Trading on an ECN platform allows traders to send their orders directly to the liquidity pool, which will be filled at market conditions and according to the current volatility. ECN trading is considered to be the purest form of Forex trading that allows a trader to interact directly with the market without worrying about any intrusion from any third parties. In most circumstances, traders do enjoy lots of anonymity in the liquidity markets, as brokers do not usually reveal the source of the order to their liquidity providers.
ECN Forex brokers are becoming incredibly popular among modern traders due to the multitude of benefits of an ECN account. From a businesss perspective, brokers would rather prefer to become a market maker broker due to the limitless profit potential from losing traders. According to verified statistics done on market participants and real live FX trading accounts, it is estimated that almost 90% of traders lose money in the markets. Therefore, brokers can offset the costs of paying their winning traders by receiving close to 90% of their revenue from traders that lose consistently.
Market Makers, STP brokers, and ECN brokers have a significant amount of differences in trading regarding the type of order execution, cost of trading, market access protocols, and other trading conditions. Here is an in-depth look at the three different types of Forex brokers available in the market:
Market makers are Forex brokers that act as a dealing desk for traders by passing orders internally between their clients. For instance, if a trader sends an order for buying the GBP/USD pair at a particular strike price, a market maker broker will search for other traders in its traders database that are willing to sell the GBP/USD pair to take the counter side of the trade. If the broker can find a match, all parties enter the market by having their order successfully opened at the predetermined strike price. Of course, Forex brokers have automated dealing desk platforms that match orders internally to considerably reduce the time of operations, rather than manually matching all the trades through dealing desk representatives. There may be dedicated staff and other professionals that are assigned to manage the different aspects of dealing desk, but most orders are usually passed through an automated system.
However, if the market maker broker is unable to find a counterparty to the trade, the broker might choose to decline the order and ask the trader to send another order request at a different strike price. The process of rejecting an order and requesting a new one is known as a requote, which is a common occurrence among market makers. At times, some brokers may choose to take the opposite side of your trade by trading against your position. These counterparty trades are considered illegal by several regulatory authorities, especially due to the conflict of interest that may arise between a broker and the trader on a single position. Therefore, the eventual conflict of interest between brokers and traders is considered as the main drawback of Market Maker Brokers.
ECN brokers are entirely opposite to market makers, as there is no dealing desk between a trader and the market. All orders are passed directly to the liquidity providers, where orders are lapped up by the liquidity in the markets. ECN brokers connect their traders to different liquidity providers, where the process of order matching is done at the interbank level. Liquidity providers may take the counter side of an order at market price, or pass it on to other clients if there is enough liquidity in the markets. There is a considerably less chance of an order being rejected by an ECN network, as a liquidity provider will be able to offer at least a partial fill according to the existing volumes and liquidity. The downside is that there can be significant slippages between the quoted price and the entry price since markets are known to move significantly with the span of a few seconds.
ECN Forex brokers only act as a middleman to these transactions, where all the fees of trading are paid as markup spreads and commissions. Due to the amount of liquidity in the ECN markets, traders get access to the best pricing that promises up to 0 pip spreads. Therefore, ECN brokers can only sustain their business model by charging a small commission per order. Some brokers might also choose to include their commissions as markup spread, which allows traders to enjoy full ECN conditions without factoring in any additional costs of trading.
ECN brokers support all types of trading strategies without any reservations. Since an ECN broker does not act as any counterparty, traders can scalp, hedge, and exercise total freedom over their trades. Of course, the brokers are expected to follow all rules of trading as prescribed by the regulatory agencies, which might inhibit traders from having total control of the markets, but clients can expect to have a fairly transparent trading environment without infringing on any broker specified trading conditions.
STP (Straight Through Protocol) brokers are considered to be a hybrid of the Market Maker and the ECN protocols. STP brokers are known to offer the best of both worlds but are not usually preferred by professional traders due to the obvious benefits of a real ECN account. STP broker may act as market makers, or they may choose to pass on orders to interbank liquidity providers. Therefore, unlike real ECN brokerages, STP Forex brokers do have a slight amount of conflict of interest, which render them less attractive than pure ECN conditions. On the contrary, STP brokers are far better than market maker brokers, especially since STP accounts offer excellent trading conditions, lower cost of trading, and better pricing.
ECN brokers provide direct market access, which guarantees better pricing than any other type of trading accounts.
ECN accounts have the tightest spreads among all protocols, which start from 0 pips on major currency pairs. The cost of trading is also comparatively lower than STP and market maker accounts.
ECN Forex brokers pass their clients orders directly to a liquidity provider. Therefore, brokers do not open an order against their clients; neither do these brokers take the counter-side of a trade.
ECN liquidity providers offer instant execution and traders can ensure that their orders will be filled in the market depending on the liquidity and the volumes.
In case there isnt sufficient volatility in the markets, ECN liquidity providers ensure that orders are filled partially at different strike prices. Since ECN protocols connect traders to large global liquidity providers, there will always be a counterparty to a position, regardless of the order size and the market volume.
ECN brokers are popular for offering the best deposit and withdrawal options, which guarantees that all payments are made on time without any issues.
ECN trading is usually anonymous, as traders can place directly according to existing market rates. Even if liquidity providers can see your order, your broker makes it impossible to track orders to a particular trader or a group of traders.
What Are The Drawbacks of An ECN FX Trading Account?
ECN traders should possess a large trading capital in order to open orders at interbank rates. Direct market access have minimum lot requirements, which sees orders being opened in millions, rather than a few hundreds that are transacted in micro and mini accounts from market makers.
ECN brokers offer the tightest spread as per the existing market rates, but there is always a commission per trade that can start from $2 per traded lot. Some brokers might also charge hefty commissions and stipulate higher fees for trading on an ECN account.
ECN Forex brokers dont have a role in determining the price of the currency pairs, but orders are susceptible to heavy slippages. Unlike STP and market maker brokers, there are no requotes, but orders are filled at the market price that can change within milliseconds.
ECN Forex brokers cater to large institutional investors and professional traders that have access to a significant trading capital. However, brokers have started to realize the rising popularity of ECN trading among smaller retail traders. Therefore, ECN brokers now offer dedicated ECN Forex accounts that come with a high amount of leverage to allow traders to enter the markets by holding significant orders in the market with a lower margin requirement. Some of the top ECN brokers offer leverages as high as 1:1000, which is incredibly risky in the volatile FX markets. Smaller traders might face margin calls if they experience negative slippage, which can move the strike price by 20-25 pips. If a trader uses the full margin of 1:1000 on an ECN account with negative slippage, the broker can induce a margin call after 10 pips move in the opposite direction, or if the account equity falls below 10%.
Smaller traders can open an ECN account with as low as $1, but you should be careful about using leverage. We wouldnt recommend using anything higher than 1:100, but if you have excellent money-management skills and a disciplined approach to trading, you can enjoy excellent results in an ECN account. Some ECN Forex brokers also offer a trading account with a modest minimum deposit requirement of $100, which can help in eradicating most of the major downsides of a higher leverage.
The best indicator of an ECN protocol is the information related to the volumes and the market depth that gives a clear indicator of the buy side and the sell side of a currency pair. Market maker accounts are not able to offer you any liquidity or market depth information as all orders are filled at broker level. ECN liquidity providers, on the contrary, give you a clear picture of the volatility of the market and can provide you with a fair idea about the supply and demand dynamics of a currency pair.
ECN accounts also offer tight spreads that are always quoted in between 0 and 1 pip on the major currency pairs. Unless there is extreme volatility in the markets, most market situations have highly competitive spreads that rarely go above the 1 pip mark. Commissions also play a significant role in the cost of trading, but some ECN brokers might choose to add the commission as a markup on their spread. Therefore, read brokers guidelines to have a better understanding of their costs and commissions for a real ECN account. It is always in your best interests to be informed about your trading environment before investing your money in the markets.
ECN brokers offer direct market access through the MT4, the MT5, the cTrader, and theCurrenex platforms, which are some of the most popular third-party ECN platforms available in the market. The MetaTrader platform in its MT4 and MT5 guises uses an ECN bridge to connect traders to a liquidity provider. MT4 was primarily designed as a market maker platform, but the developers of the MetaTrader have provided additional ECN protocols through bridges to ensure that brokers can pass orders to an interbank liquidity provider if needed.
The cTrader and the Currenex platforms are real ECN platforms that are designed from the ground up as dedicated ECN terminals with direct market access. The cTrader and the Currenex platforms do not use any ECN bridges, which increases the speed of execution and reduces the latency of trading. The cTrader is one of the most popular ECN platforms that offer excellent information about market depth, currency volatility, and the raw ECN spreads, which always ensure that the traders can receive timely information about the market when it matters.
ECN accounts are significantly different from traditional STP or market maker accounts. Orders are not always filled at market price, which requires a trader to be careful against slippages, price variations, and partial orders. STP accounts are binary in their operations, which either opens an order or declines it according to the existing volatility. On the other hand, ECN accounts are more direct in their approach, which will require you to tweak your trading strategy ever so slightly to incorporate the changing ECN conditions. Take your time to get comfortable with an ECN Forex broker by opening a demo account. We have a list of some of the best Forex brokers in the market that offer real ECN accounts without burdening their smaller clients with impossible trading conditions. Regardless, it is up to you to create a winning strategy that will help you to stay on top of the Forex market.
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