This video provides an introduction to electronic communications networks (ECNs), systems that allow buyers and sellers of stocks to trade directly without an intermediary.
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Most forex traders
participate in the forex market with forex brokers. There are mainly two
types of forex brokers: market makers and electronic communications
networks (ECNs). In this article we want to introduce the latter type of
brokers, the ecn forex broker.
What is an ECN forex broker?
ECN forex broker is a financial expert that provides the clients with
direct access to other forex participants in the currency market by
using electronic communications networks (ECNs). Unlike market makers,
which always trade against their clients to make profit, an ECN forex
broker only creates opportunities of trading between forex traders.
How does an ECN forex broker work?
The ECN
forex brokers provide a medium by passing on the prices for different
market participants such as banks, market makers and other traders in
the market. Then the best bid/ask quotes will be displayed on the
trading platforms based on these prices. ECN forex brokers also serve as
counterparties to forex transactions, but it is a settlement that they
operate on instead of pricing basis. While fixed spreads are offered by
some market makers, spreads of currency pairs can be very different,
determined by the trading activities of the currency pair. In active
trading periods, sometimes you cannot get ECN spread at all, especially
in those very liquid currency pairs such as the majors (EUR/USD,
GBP/USD, USD/JPY, USD/CHF) and some currency crosses.
Pros and cons of the ECN forex broker
The ECN forex broker has both advantages and disadvantages. The pros and cons of the ECN forex broker are as follows.
The pros of the ECN forex broker can be presented in following aspects.
Traders can usually get better bid/ask prices for they are derived from multiple sources.
At certain time traders may trade on prices with no spread or with only very little spread.
Genuine ECN forex broker will pass on the orders to a bank or other
trading participants on the opposite side of the transaction instead of
trading against the traders.
It is very likely that the prices on the ECN forex broker are more volatile.
Traders can take on the role of market traders to other traders on the ECNs since they can offer a price between bid and ask.
The cons of the ECN forex broker can be presented in following aspects.
Many ECN forex brokers do not provide integrated charting or new feeds.
Some trading platforms are not so easy for traders to use or operate.
Since there are variable spreads between the bid and the ask prices, it
may be difficult to calculate stop-loss and breakeven points in pips in
advance.
Forex traders are obligated to pay commissions for each transaction.
It is obvious that there are both pros and cons of an ECN forex broker.
Traders have to take many factors into consideration when choosing a
forex broker.
