Forex is a popular market for those who are interested in trading, and there are different types of traders and consequently different trading styles. One of these styles is ECN Forex trading. The abbreviation ECN stands for electronic communication network, and many are viewing it as the future of Forex trading. ECN can be described as a bridge linking smaller participants in the market with tier-1 liquidity providers through an FX ECN broker. This link is is created with a sophisticated technology setup, which is called a FIX (Financial Information Exchange) Protocol. On one hand, the broker obtains liquidity from tier-1 liquidity providers (i.e major banks) and thus makes it available for trading to its customers, whilst on the other hand, the broker delivers customers' orders to liquidity providers for further execution.
What does ECN actually represent? It is an automated system that matches purchase and sell orders for securities. ECN Forex connects individual traders and major brokerages so that they can trade directly between themselves without having to go through a middleman. ECN makes money by charging a fee for every transaction made. ECN makes it feasible for investors in different geographical locations to swiftly and without obstacle trade with each other. In the USA, the Securities and Exchange Commision requires ECNs to register as broker-dealers, so the following institutions exist in countries outside the USA.
There is more to ECN. Forex ECN attempts to remove the third party's role in executing particular orders entered by either an exchange market, or an over-the-counter market. This enables such orders to be completely or partly executed. On a side note, orders placed through ECNs are mostly limit orders.
In addition, ECNs demonstrate the best accessible ask and bid quotes from a specific amount of market participants, then automatically match and consequently execute orders. They not only facilitate trading on major exchanges during market hours, but they are also used for after-hours trading and foreign currency trading. ECNs actually allow for automated trading, not to mention fast execution and passive order matching. Moreover, some ECNs are developed to serve institutional investors, whilst others are designed to solely serve retail investors.
What is ECN Forex? In order to answer that we should mention the different ECNs that are available. Some of them even require a brief history to get the best understanding. Pioneer ECNs include SelectNet, Instinet and NYSE Arca. Instinet was the first ECN (1969) and it is applied by minor brokerages and for specific transactions between establishments. It is widely applied by market makers for Nasdaq trades, although individuals and small companies can use it as well. As for SelectNet, it is used first of all by market makers, but it does not require instant order execution and it assists investors in trading with particular market makers. One more example from history is NYSE Arca, which grew out of the merge between the New York Stock Exchange and Archipelago (an early ECN set in 1996). It simplifies electronic stock trading on major US exchanges that include the NYSE and Nasdaq.
Let's now move ahead to the main goal of our article: what is ECN trading?
What might a broker in ECN offer you?
On the internet you will find vast numbers of brokers who claim to be ECN brokers. We would like to exemplify some features ECN brokers may provide you with. However, the following example does not reflect the whole spectre of advantages various ECN brokers may offer - there could be more or less of the features mentioned, so you just need to be cautious.
Firstly, all ECN trading activity can be absolutely anonymous. This anonymity allows Forex traders to deal on neutral prices that reflect authentic market conditions that are not biased.
The majority of brokers offer immediate trade execution. This implies that clients can trade Forex instantly on live streamed prices with immediate confirmation. Some brokers may simply provide a last look to price makers, while others consider it their duty to make their trades final and confirmed once as they are dealt. Therefore, there is no dealing desk to intervene and there are no requotes. Test whether this is suitable for your trading style with a Forex ECN account demo. As for the client-to-bank trading, some ECN models permit clients to trade on the global liquidity of world class banks and also qualified financial institutions.
We have previously mentioned that ECN allows for automated Forex trading. It also grants access to market data. Therefore, some brokers permit clients through using their API to connect their trading models, as well as risk management systems to the broker's market data feed and also matching engine. Some brokers claim that they have included best bid and best ask prices in their live and executable market data. However, be careful with such claims and check out the demo ECN Forex account first. The last point to mention is that specific ECN brokers can offer you variable spreads, unlike dealers. Additionally, you might get access to market prices.
ECN Forex trading on the most popular trading platform
MetaTrader 4 is the FX trading platform offered by more than 60% of all FX brokers and used by 90% of Forex traders. It has earned its popularity owing to its splendid design and stunning practical efficiency. ECN puts the FX trade out there with interbank and the entire market. Until recently, there were claims that it was impossible for MT4 ECN to exist. However, time has shown that it is not only viable, but that it also produces great results according to user testimonials.
It goes without saying that MetaTrader 4 is for the market maker. The MT4 trading platform was built for the retail Forex trader and their ECN trading account. It is intuitive, simple and provides everything a novice or experienced Forex trader requires. It considerably facilitates buying and selling, as well as offering many other interesting features.
Going back a few years ago, MT4 ECN at first glance seemed unnecessary. In fact, the initial reaction to this concept was that it seemed like something impossible. If an FX trader wanted to use the standard platform, they were supposed to trade solely with one broker. Nonetheless, the demands of the retail FX trader ultimately became heard, and MT4 ECN was developed.
Talking about ECN with a spread, we should mention the following. ECN trades go out into the overall market. It is traded through interbank, as well as large financial institutions, and the spread between pairs is trivial, if anything at all. Most often, Forex brokers that deal with ECN trade charge commissions for this reason. They are not actually making money from taking the other side of the trades, and because they are dealing with interbank and large financial establishments, the margin is considerably higher and the trading allotment is greater.
The advantages of MetaTrader 4 ECN may seem obvious. The FX trader does not have to worry about his trade getting lost or worse - having the trade refused. Moreover, orders are seen by others in the marketplace. The pool is much larger and the order price may be touched and then filled, as opposed to always having to analyse the price to assure a fill.
Furthermore, when trading ECN on MT4, the spread is tight and the orders are conducted much more efficiently. There are no requotes and all market orders are filled at the best price possible, so there is no conflict of interest. The Forex broker is not on the other side of the trade.
But what is at the other side of all this? It may not look like a disadvantage, but perhaps a simple fact should be taken into account. The volatility involved in MT4 ECN is exponentially increased. You are dealing with an interbank Forex market. What is Forex ECN? When trading this market, you are dealing with the big players. This market is not slowed down for anybody, whereas with market makers, it is a relatively more controlled environment. Furthermore, as opposed to actually dealing with market makers, the MT4 ECN situation is dependent on volume, so the FX trader should make sure they are in a liquid market. With FX market makers, whether or not a Forex trade is filled has nothing do with volume.
Forex ECN trading can be a good opportunity. Your task is to study all the important aspects of it and eventually decide whether it suits your style of trading. ECN has shown a great rate of popularity for many reasons. ECN also involves selecting a broker that can completely supplement all of your needs.