7 Facts You Didn’t Know About ECN Brokers
There are different types of brokers today, which can be categorized both by how they operate and by the assets or instruments they offer to their clients.
To give an idea, some brokers offer access to the stock market. Meanwhile, others specialize only in the forex market or futures contracts. Some allow their clients to trade on different instruments, such as Forex brokers, which offer many currency pairs, commodities, contracts for difference based on various assets, and others.
7 interesting facts about ECN brokers
- Direct access to the financial markets
- ENC stands for Electronic Communication Network, as an ECN broker uses it to give its clients direct access to other market participants. In other words, it is a business that offers the trader direct access to the market.
- Adjusted and variable Bid / Ask spreads.
- This type of broker consolidates prices from other market participants and allows its clients to trade with adjusted and variable Bid / Ask spreads, which they do not have access to through other brokers.
- As an ECN broker only establishes a link between the orders of market participants. However, it cannot negotiate directly with the client, a complaint often directed against certain brokers.
- No intermediary in trading
- It is an electronic system aiming to eliminate the role of a third party in the execution of orders placed on the market by a market maker, whether on a market or a centralized exchange or an Over The Counter market.
- An ECN connects major brokers and individual traders so that they can trade with each other without having to resort to the services of an intermediary. Always choose between regulated forex brokers if your goal is to become a successful trader.
- Financial Information Exchange Protocol-based technology
- A forex broker with the ECN (Electronic Communication Network) system acts as the link between forex traders and liquidity providers in the market. Likewise, ECN brokers have access to different prices offered by major banks on the interbank market in STP (Straight Through Processing) mode, thanks to FIX (Financial Information Exchange Protocol) technology. That’s how these brokers can provide a market price to their clients and place their orders.
- The ECN broker then displays the best prices (Bid / Ask) of the currency pairs obtained from these different providers and draws the lowest possible spread. Only a commission will be charged on each trade, there are no other brokerage fees, and the prices are transparent.
- Trading orders are executed instantly.
- The advantage of an ECN broker is the speed of action. Indeed, trading orders are executed instantly without any re-quotation. It enables avoiding the conflict of interest that there might be. Another advantage is that traders enjoy complete anonymity; the stop orders of each client are not known.
- Usually offers lower spreads than market makers.
- The market maker brokers system offers bid and ask prices for the instruments they provide to their clients. They have technology that allows them to trade at these prices with their clients, including banks and individual traders.
- In return for each transaction concerning costs, the market maker must cover the transaction on the market using his capital. It means that every time the trader buys, the market maker sells and vice versa.
- If he hedges the transaction in the market, the broker’s income comes from the spread. Regarding the market makers, an additional amount over the spread they get from the market represents their profit for each operation of their customers. This is why they usually offer larger spreads than ECN brokers.
- Without conflict of interest between the broker and its clients
- Sometimes the broker may choose to become the counterparty to their clients and not to hedge the client’s transaction. In this way, whatever the customer loses becomes profit for the market maker.
Conversely, with an ECN broker, there is no conflict of interest because the company never acts against the client. Using the ECN network, the broker matches their clients’ orders with those of other traders. Therefore, their profits come from the commissions they charge for each trade and spread. In this way, the ECN broker never cares about the trader’s loss on his trades, quite the contrary.