Anther key thing that it is important to understand here is that the
larger a firm gets in terms of trading volume, the greater access that
firm has to tighter prices and liquidity and the more likely that firm
is to be able to pass on better pricing and execution to their clients.
This video provides an introduction to electronic communications
networks (ECNs), systems that allow buyers and sellers of stocks to
trade directly without an intermediary.
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?
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
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
Learn how to sort through the chaos and confusion on the web to learn
what forex brokers are best for individual currency traders.
What forex traders need to consider regarding the regulatory environment of the forex broker they trade with.
A look at the transaction costs involved in forex trading (the bid ask
spread, commissions, and how trades are executed) so that FX traders can
properly understand how much their currency broker is charging them.
A look at the technical and value-added features (like news, charts,
ability to trade from the web, etc) that currency traders should
consider when choosing what forex broker they select.
Forex Broker Types - MM,NDD,STP,ECN
This is small 10 minute education video about the following: the difference between Forex Broker Types - MM,NDD,STP,ECN
Forum on trading, automated trading systems and testing trading strategies
Sergey Golubev, 2013.07.01 07:19
Just next educational article about ECN and so on - Market Makers Vs. Electronic Communications Networks
The foreign exchange market (forex or FX) is an unregulated global market in which trading does not occur on an exchange and does not have a physical address of doing business. Unlike equities, which are traded through exchanges worldwide, such as the New York Stock Exchange or the London Stock Exchange, foreign exchange transactions take place over-the-counter (OTC) between agreeable buyers and sellers from all over the world. This network of market participants is not centralized, therefore, the exchange rate of any currency pair at any one time can vary from one broker to another.How Market Makers WorkMarket makers "make" or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market. As counterparties to each forex transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.The exchange rates that market makers set, are based on their own best interests. On paper, the way they generate profits for the company through their market-making activities, is with the spread that is charged to their customers. The spread is the difference between the bid and the ask price, and is often fixed by each market maker. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers. As counterparties, many of them will then try to hedge, or cover, your order by passing it on to someone else. There are also times in which market makers may decide to hold your order and trade against you.There are two main types of market makers: retail and institutional. Institutional market makers can be banks or other large corporations that usually offer a bid/ask quote to other banks, institutions, ECNs or even retail market makers. Retail market makers are usually companies dedicated to offering retail forex trading services to individual traders.Pros:
How ECNs WorkECNs pass on prices from multiple market participants, such as banks and market makers, as well as other traders connected to the ECN, and display the best bid/ask quotes on their trading platforms based on these prices. ECN-type brokers also serve as counterparties to forex transactions, but they operate on a settlement, rather than pricing basis. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs, depending on the pair's trading activities. During very active trading periods, you can sometimes get no ECN spread at all, particularly in very liquid currency pairs such as the majors (EUR/USD, USD/JPY, GBP/USD and USD/CHF) and some currency crosses.Electronic networks make money by charging customers a fixed commission for each transaction. Authentic ECNs do not play any role in making or setting prices, therefore, the risks of price manipulation are reduced for retail traders. (For more insight, see Direct Access Trading Systems.)Just like with market makers, there are also two main types of ECNs: retail and institutional. Institutional ECNs relay the best bid/ask from many institutional market makers such as banks, to other banks and institutions such as hedge funds or large corporations. Retail ECNs, on the other hand, offer quotes from a few banks and other traders on the ECN to the retail trader.Pros:
The Bottom LineThe type of broker that you use can significantly impact your trading performance. If a broker does not execute your trades in a timely fashion at the price you want, what could have been a good trading opportunity can quickly turn into an unexpected loss; therefore, it is important that you carefully weigh the pros and cons of each broker before deciding which one to trade through.