What is ECN?

Online trading exploded in popularity in the last years. Since the Internet connects people from all parts of the world, Forex brokers find it easy to attract new customers.

Not long ago, a Forex trading account had wide spreads. Most currency pairs had spreads (the difference between the bid and ask prices) even ten times than the ones we see today.

For instance, the EURUSD used to have three pips spread only eight years ago on most FX brokers. Also, the quotes were mostly four digits only, and the brokers were market makers.

ECN (Electronic Communication Network) changed everything. More importantly, the changes are in the retail traders’ favor.

What is an ECN Broker?

Perhaps the best way to describe an ECN broker is by stating what it is not. Well, it is NOT a market maker.

Also called dealing desks, market makers “mirror” the actual market. And, take the other side of their clients’ trades. There’s an ethical problem at stake, as the broker mostly makes a profit on the back on its clients’ losses.

An ECN broker avoids such issues. Not only that the broker doesn’t take the other side of the trades, but it offers much better trading conditions in terms of spreads and execution.

How Does ECN Work?

An ECN broker is a no-dealing desk broker. Moreover, it offers the best possible trading conditions by routing their clients’ orders to various liquidity providers. And, it picks the best quote to provide to customers.

The more liquidity providers the broker works with, the better. The competition for the best quote passes to liquidity providers, and the ECN broker truly represents its customers’ interests.

So, what is an ECN? Put in a simple format, ECN offers a linkage or a bridge between retail traders and liquidity providers. For the effort of connecting the two, the ECN broker, the broker charges a small fee, typically in the form of a markup on spreads. Or, in the form of commissions on every traded position depending on the volume.

An ECN trading platform, therefore, routes the clients’ orders automatically to the ECN broker’s liquidity providers. Responsible for the linkage is a FIX protocol (Financial Information Exchange) that makes sure the entire process works smoothly.

Benefits of ECN

The ECN account definition stands for the best market conditions available to retail Forex traders. An ECN broker represents the traders’ interests, being a partner interested in the trader’s success.

How come? The idea of a brokerage house is to earn a fee or commission for representation.

An active trader brings commissions. A successful active trader brings commissions all the time. Therefore, the ECN broker has a strong interest that the retail traders survive in the market and are profitable in the long run.

Therefore, the major benefit when trading with an ECN broker is that the retail trader doesn’t have to worry about the brokers’ interest. The interests align and the ethical issue mentioned earlier simply doesn’t exist.

Trading conditions are much better when using an ECN broker. Tight spreads and better execution are the norms.

Moreover, trades get executed faster. This is a tremendous advantage for traders using automated trading like Expert Advisors. But also, manual traders see less damage done by slippage.

Conclusion

There’s stiff competition among brokerage houses to attract more retail traders. But the true value of a broker sits with the efforts made to retain its customers.

An ECN broker retains the customers by offering the best available market conditions at present. Furthermore, it never trades against the trader, for the simple reason that the business model doesn’t allow it to.

By having the interests aligned, the trader and the ECN broker literally become partners in the trading arena. Both want for each party to profit: the trader from the market moves and the broker from the resulting fees from the traders’ activity.

FXOpen is such a broker. Look no further than FXOpen to represent a trader’s interests with fairness and accuracy. Moreover, FXOpen offers an affordable ECN solution with commissions starting from only 1.5 USD per standard lot.