Forex brokers that provide their retail clients with a direct access to other market participants through an Electronic Communications Network (ECN), are known as ECN Forex brokers. Such a network ensures the link between retail traders and their broker’s liquidity providers through a complex technology setup, known as Financial Information Exchange (FIX) Protocol. On one side, the brokerage gets liquidity from its liquidity providers and then makes it accessible to its retail clients (traders). On the other end of the link, the customers’ trading orders are delivered for execution to the broker’s liquidity providers.
What is specific about ECN Forex brokers is that they are never engaged in trading operations against their clients, as their major function is to simply match trading orders between participants in the market. For their services, true ECN brokers generally charge customers a fixed commission per transaction, which means that their profitability is dependent on trading volume generated by their clients. In addition, as ECN brokers consolidate price quotes from several market participants, their customers are able to take advantage of narrower bid-ask spreads.
The Electronic Communications Network connects buyers and sellers by granting them access to information associated with current orders in the exchange and also automatically matches and fills these orders at the best prices available. At a moment, when no specific information about orders is present, the ECN will provide quotes that reflect the lowest ask and the highest bid currently listed.
Several benefits are generally associated with ECNs:
- First of all, the ECN model allows traders to operate in a global liquidity pool comprised of world class banks as well as other regulated, qualified and competitive financial institutions.
- Another key feature of such electronic systems, which benefits Forex transactions particularly, includes the opportunity for traders to access the market outside the ”regular” trading hours. This allows for more flexibility for traders who are unable to constantly keep track of price movement and act during normal market times.
- Most ECN Forex brokers offer immediate execution of trading orders. This means that their customers are able to trade instantly by using live-streamed prices, with all deals being final and confirmed immediately. With the ECN model, there is no intervention by a dealing desk as well as no requotes.
- What is also relevant for the Forex market is the fact that ECNs have proven to be quite efficient for participants who use expert advisors for automated trading, because of the higher execution speed they allow for. The ECN also allows access to market data. Some ECN brokers grant their customers the opportunity to link their trading algorithms and risk management systems to the brokers’ market data feed by using the brokers’ application program interface (API).
- Due to the nature of the ECNs, trading activity tends to be anonymous. Traders are able to take positions on neutral prices reflecting unbiased market conditions at all times. This way no built-in advantage is granted to any trader over the others because their access to the information is equal.
- Last but not least, it is crucial to note that ECN brokerages, unlike dealers or market makers, have no control over bid-ask spreads of available trading instruments. In other words, they are unable to offer their clients one and the same bid-ask spread for a given instrument all the time. Thus, they usually offer variable spreads.
All in all, the ECN model is considered by some as being the future of the Foreign Exchange trading, with true ECN brokers offering a set of valuable benefits to their clientele.
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