What is ECN?
The Forex market is a highly competitive area, and many broker companies try to keep up with each other by constantly reinventing themselves. The latest trend among brokers is the ECN possibility.
ECN grows widely in popularity because it offers a more secure way of trading.
Many Forex companies cannot deliver what they claim they can, and mostly, at the expense of their clients. Signing up with the wrong Forex broker can be an expensive adventure.
ECN is the new trend and spreads rapidly among serious traders. It stands for the Electronic Communication Network, an online system representing the main string between brokers, retail traders, and liquidity providers. Finally, one broker that actually cheers for you to win.
Why do Retail Brokers Hope You Lose
Forex demands a mutual relationship of two parties. There is no trade execution if you and your counterparty do not both participate. The basic rule is if you win money, your retail broker loses money. This already explains the fact why your retail broker does not want you to win.
Your broker is your competition given that you bet against them. On the other hand, your broker is the one providing you with their services including liquidity. This is exactly the item that gives way to controversy and tension between you and your broker. They are in charge and determine the prices and spreads, whereby you can earn money under the limited conditions they imposed. And even if you win – they will not be happy.
Forex brokers work on the principles that chances are greater to lose than to win and if they can help your loss, they will, by imposing limited access, a number of procedures you discover afterwards, hidden fees, etc.
Another thing is that most retail brokers cannot support big profit winners (or experienced traders) for a long time. They are not liquid enough to cover huge frequents profits.
Their target groups are small traders and casual traders where the risk is higher for the trader than the broker.
Not to get it wrong, many retail Forex brokers do a good job and pay out their clients, but the natural course of this business drives them to protect themselves, and as long as it stays within the legal framework the trade is still fair.
How Does the ECN Differ From my Retail Broker?
As we’ve already mentioned, ECN is an electronic system that basically links you to a third party. The good news is that their profit does not depend on your loss. Your assets are in no relation to their profits. In accordance with that, there is no dealing desk.
Yet again, we come to the question of liquidity. ECN is not the liquidity provider for their customers, but the third party is. Usually, banks or renown firms act as liquidity providers.
The more liquidity providers the ECN secures, the better the spreads for their traders. In this way, they can offer really low and competitive spreads.
Investors and traders are automatically linked to the best quotes. After this, the broker’s job is done, and he forwards you to the liquidity provider.
In short, your counterparty is your liquidity provider, meaning that you trade against the third party you have been referred to.
The role of the ECN broker is to collect money from the liquidity provider if you win, and in case you lose, they simply cover your loss with your money. Yet again, the broker does not interfere with your investments.
The main difference between retail brokers and ECN brokers is conflict of interest. With ECN, there is no conflict of interest given that the broker assumes a neutral role.
ECN Brokers and Profits
The ECN brokers so far seem too good to be true, but there is one question that will naturally come to your mind. What is in for the ECN?
We’ve already established that whether you win or lose, the ECN broker remains unaffected.
There are two ways how ECN makes money:
• The markup model
It works by putting an additional markup to the spread. This means that if the actual spread is a two-pip difference, your broker will add one more pip to make it a 3-pip spread. This is very similar to how fees and commissions work.
In case you win, the spread difference is split between your ECN broker and your liquidity provider. The official spread goes to the liquidity provider and the additional pip to the ECN (in this example, two pips would go to the liquidity provider and one pip to the ECN broker).
On the other hand, if you lose, you cover your investment and the spread difference. Your ECN broker still gets their share, as well as the liquidity provider.
• Commission or fee
Sometimes, instead of widening the spread difference for one or more pips, ECN brokers simply impose a fee for their services. How they charge and impose the commission is completely up to the ECN broker and varieties are numerous. It all depends on the preference of the ECNs.
Usually, it comes down to the same thing where the fee is balanced out with the markup of spreads so that you remain unaffected regardless of the method they use.
Your ECN Broker and You as a Team
The best ECN Forex brokers are definitely the brokers on your side. It sounds a little bit strange and unbelievable, but it is true.
Let’s see what is in it for them if you make a profit. The trade volume of their customers influences their profit-making. A trader who wins is willing to invest more, which is more than convenient for the ECN broker. Both of you take money from the same source, and the liquidity provider is your shared “enemy”.
The Best ECN Forex Brokers and Their Clientele
As opposed to retail traders who actually depend on small traders, beginners, and casual traders, the ECN are more convenient for big traders who invest a lot of money. Maybe that is one of the reasons they require higher deposits than retail brokers. Eventually, it will pay off to trade with ECN brokers because:
- they never trade against their clients,
- they offer more competitive spreads,
- multiple options which are unavailable with retail brokers,
- no conflict of interest
Top ECN brokers enable their investors to place trades that are bigger than five standard lots which is an enormous amount of money.
The best ECN forex Brokers will behave according to all that was mentioned in previous passages.
Watch Out for Brokers Pretending to be ECNs!
Good news is that standard brokers can offer the ECN services additionally, giving their customers wider options. The bad news is that many brokers claim to be a top ECN Forex broker, while in reality, they do not offer these services. Find out if the broker acts under false pretences by:
– Asking basic questions (e.g. are the spreads fixed or fluctuating?)
– Observing if there is a dealing desk (if so, they are not an ECN)
– Opening real and demo account to look for differences in spreads
Top ECN Forex Brokers seem to be the right choice for traders who are looking to get the best out of their investments. With a broker on your side, you can hardly go wrong as long as you use other trading advice to create profitable trades.