ECN Trading Guide

In this article we will explain why ECN execution is so touted by many types of traders.

In this post you will find information about:

• What ECN is and what it means
• How ECN execution works
• How ECN brokers make money
• Pros and cons of ECN execution

What is ECN forex trading?

ECN stands for Electronic Communication Network, and forex brokers using this technology connect all the different parties through a network populated by both retail and institutional parties in order to secure low spreads and deep liquidity.

In addition, ECN trading means having very low latencies and execution speeds, and many traders prefer this type of technology because it is considered more transparent than that used by broker market makers.

How does ECN trading execution work?

When an ECN broker receives a request for an order from a trader, it immediately looks for a counterparty to match within the ECN network.

The counterparty the broker seeks must be willing to buy or sell at the price decided by the trader.

If the broker does not find a counterparty with a buy or sell order identical to that of the trader, the broker looks for an order with similar price levels on the ECN network.

Once the counterparty is found, the order gets completed.

What is a true ECN broker?

A True ECN broker is a broker that uses only ECN execution to handle orders. The only brokers that offer true ECN technology are institutions that use third-party technologies such as white labels.

However, most online brokers are not true ECN because they use their own technologies and use hybrid Market Maker, STP, or ECN executions depending on factors such as market, risk, and internal broker liquidity.

In any case, some of the brokers in the market focus more on one type of execution than others, as is the case with brokers such as IC Markets and Pepperstone, which obtain prices from an ECN network and provide them to their traders without a Dealing Desk.

(74-89% of retail CFD accounts lose money)

Are ECN brokers safe?

ECN brokers are considered safer than other brokers because they offer a more liquid trading environment without interference from the Dealing Desk. For these reasons, they are also considered more transparent.

This should not distract from the fact that “safe” does not mean that the trader cannot lose money. In fact, trading with an ECN broker is just as risky as trading with any other broker, since it is the activity itself that is risky.

However, using an ECN execution is not synonymous with a safe and transparent broker. The most important factor is to choose a regulated ECN broker.

How do ECN brokers make money

ECN brokers make money from the commissions they charge the trader.

The spread on ECN accounts is often unmarked, which is why brokers charge a fixed commission on the transaction ranging from $5 to $10 depending on the broker.

In addition, ECN brokers often operate with leverage and derivatives, so if the trader leaves a position open after the market closes, the trader will incur an overnight fee.

Finally, ECN brokers, like other brokers, may charge commissions on deposits and withdrawals, as well as on currency conversion.

For more information on ECN commissions, check out our related article.

Advantages and downsides of ECN forex trading

Pros

• The spreads on offer are usually always extremely low
• High liquidity is almost always available
• The execution speed is as fast as you will find anywhere

Cons

• Performance will depend on the quality of the individual ECN network
• Liquidity very much depends on third parties due to the nature of this broker style