Pros and Cons of an ECN Forex Broker

Although electronic communication network (ECN) technology has existed since the 1970s, it wasn’t until 1999 that it appeared on the foreign exchange (forex) market. In many ways, it represented the great equalizer, creating level ground with an accent on execution speed and cost transparency.

This article will look into the peculiar details of ECN brokers and their trading platform — explain their business model, trading cost and reflect on the strengths and weaknesses of this trading network.

Get Started

Earn Cashback on Your FX Trades

Open an account in as little as 5 minutes. Spreads as low as 0.0, trade and manage your positions from a full suite of mobile and tablet apps.

Get Started

Disclosure: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% to 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account

Show More

What is an ECN Broker?

An ECN broker is a financial intermediary that allows its clients to execute orders on financial markets through an electronic communications network (ECN).

This currency broker is strictly an intermediary, so it doesn’t take these orders on its books but simply matches them between the market participants.

Because an ECN broker often uses multiple liquidity providers, the spread (difference between the buy and sell prices) is usually narrower. Instead of offering wider spreads, the ECN broker receives compensation through a fixed commission per transaction.

Benefits of ECN Brokers

ECN brokers offer significant benefits. Consider the following with ECN trading platforms:

Lower Bid and Ask Spreads

ECN brokers consolidate price quotes from liquidity providers, offering deeper liquidity. For that reason, spreads are smaller, creating particularly beneficial situations for short-term, high-frequency traders.

Quicker Trade Execution

ECN functions as an automated system that matches market participants' orders directly. Because the forex broker only passes trades through, there is no dealing desk downside, such as price requotes that might delay the execution.

Flexibility

ECN brokers don’t operate dealing desks, giving them higher flexibility in their operations. Meanwhile, an ECN network allows traders to trade over-the-counter (OTC) even outside the busiest market hours without a conflict of interest with the forex broker as a counterparty.

Flat Commission Rate

ECN brokers charge a volume-based commission rate while minimizing or, in some instances, eliminating the spread. This approach allows for better trade planning because total trading fees are just a simple calculation away.

Drawbacks of ECN Brokers

ECN brokers offer many benefits, but their business model isn’t without downsides.

Market Fragmentation

Market fragmentation is a phenomenon of the same asset trading at different prices. With ECN brokers, that might happen if the underlying asset experiences a dip in liquidity when fulfilling a large order outside of high market hours.

High Minimum Account Values and Trade Sizes

ECN brokers make money on trading volume. Still, providing a customer with the service is a cost that needs to be recouped so ECN forex brokers often have higher minimum trade accounts and trade sizes.

Can Be Less User-Friendly

ECN broker platforms sometimes don’t offer extensive charting capabilities, news feeds or other features that might help traders. Traders who want those features should test ECN accounts before committing.

ECN Brokers vs. Dealing Desk Brokers

ECN brokers focus on matching the order with an opposite one from their liquidity pool. They’re also referred to as nondealing desk brokers because they don’t trade themselves.

Dealing desk forex brokers take the other side of the trade and then manage that risk. Essentially, they make the market so they are classified as the market maker.

This approach allows for offering more stable or fixed spreads. But those spreads are usually higher to compensate for risk and enable the dealing desk to profit by selling at a higher price.

Traders have two main issues with dealing desk brokers. The first is the conflict of interest because the broker trades against the trader and profits from its loss — encouraging price manipulation. Second is price requotes and execution delays that might arise in unstable market trading conditions.

ECN Forex: Suitable for Most Traders Needs

In the early days of electronic forex trading, the broker market in many ways resembled Wild West. Despite some honest operators leading the way, many shady or straight-out illegal brokers made and broke the market to steal clients’ funds.

In those circumstances, ECN was the breakthrough technology. It leveled the playing field, giving all market participants the same access and opportunities in the forex market by providing an ECN account.

At the same time, it created a transparent environment where brokers have no conflict of interest but simply focus on fulfilling orders for a commission — an environment that perfectly suits most traders’ needs.

Frequently Asked Questions