The best ECN Brokers for Forex Trading

ECN Trading is considered to be the most transparent market model that can run behind the trading interface of a Forex broker: No conflicts of interest, tight spreads and an equal view of the order book for all participants in the network are the main arguments that ECN brokers put forward for their offer.

ECN Brokers: Interesting facts about the market model

  • ECN brokers forward client orders to a trading network
  • The prices are formed without influence and changes due to supply and demand
  • With ECN “in its pure form” there are no conflicts of interest
  • ECN brokers earn money only through commissions
  • Trading is possible with spreads from 0.0 pips

How ECN Trading works

The abbreviation ECN stands for “Electronic Comunication Network” and in connection with foreign exchange trading refers to market models that connect private traders to a network. The network includes banks, brokers and other networks in addition to other private investors. In simplified terms, all network participants can offer and request liquidity – an ECN is an off-exchange marketplace for FX trading.

As on any other (real) market place, prices are determined by supply and demand. The more participants are connected to an ECN, the more liquidity is available on the market place and the more efficient the price formation on the market is. Efficient price formation in Forex trading is synonymous with narrow spreads and strong market depth.

Functionality of ECN Brokers

INTEGRATION INTO A NETWORK

With ECN Trading, ECN brokers integrate their trading customers directly into a kind of liquidity network. All participants within this network have the possibility to enter orders directly into the order book of the ECN Broker. Orders once entered into the order book can be viewed and tracked at any time. Orders can usually also be placed within the spreads in the order book.

TASKS OF THE ECN BROKER

The service of ECN Brokers consists of providing access to the network and technical processing. The brokers forward their customers’ orders to the network’s electronic trading platform, where they are executed.

COMMISSION INSTEAD OF SPREAD

As already mentioned, price formation is based on supply and demand, on which the ECN Broker has no influence. In the best case no spreads are to be paid for this. Since ECN Brokers do not profit from the spread, they usually offer advantageous spreads with a small difference between bid and ask price (bid-ask difference). ECN brokers generally achieve their turnover by charging a commission.

Profit from ECN Trading

WHAT ARE THE ADVANTAGES OF TRADING VIA AN ECN BROKER?

An ECN Broker offers its customers numerous advantages. For example, forex traders profit from relatively narrow spreads with ECN brokers. Furthermore, the fee calculation with ECN brokers is much more transparent than with STP trading. However, customers of an ECN Broker not only benefit from the high transparency of this business model, but also from direct access to the foreign exchange market, high cost savings and high liquidity.

ECN BROKER: ADVANTAGES AT A GLANCE

  • Narrow spreads
  • Transparent calculation of fees
  • High Liqiudity
  • Direct access to the interbank market
  • Cost saving

Differences to STP and Market Making

This makes the market model of ECN brokers fundamentally different from that of other types of brokers. ECN brokers are “brokers” in the narrowest sense: The remuneration is exclusively for the forwarding of orders to the ECN and the technical processing including account management etc. “Real” ECN brokers therefore earn money exclusively through commissions. The prices and thus also the spreads in the ECN, on the other hand, are beyond the broker’s control and are regulated solely by supply and demand on the virtual marketplace.

MARKET MAKERS CAN TRADE AGAINST THEIR CUSTOMERS

By way of comparison, market makers do not initially forward customer orders, but execute orders by offsetting them against opposing positions of other customers and, if necessary, also enter the counterparty position to the customer themselves. It is difficult for traders to understand from the outside whether market makers hedge overhanging net positions and thereby avoid conflicts of interest. In the worst case, market makers earn money by trading against their own customers – and in doing so they also determine the settlement prices themselves, since “market making” is by definition not a market in the true sense of the word.

STP TRADING IS OFTEN NOT TRANSPARENT

STP brokers are considered by advanced users to be a much better alternative to market makers. STP (Straight Through Processing) trading means that brokers forward customer orders to a liquidity pool and have them executed there. Banks and other institutional market participants, for example, are affiliated to the pool.

This market model is much less transparent than ECN Trading for several reasons. Firstly, it is difficult to understand externally the rules according to which orders are executed. Secondly, it is unclear what changes the broker makes to the price before it is listed in the client’s trading platform. Mark-ups on the spreads of the bank pool, for example, are common in the market. Thirdly, it is (often, but not always) unclear how many and which banks are linked to the pool. In extreme cases, the “pool” consists of a single bank, which then acts as a disguised market maker.

Unlike an ECN, an STP liquidity pool is merely the result of the contractual relationship between a broker and partner banks. Traders can hardly estimate from the outside what agreements exist in terms of order volumes, broker’s remuneration, etc. and according to which algorithmic patterns the prices in the trading platform are derived from those in the bank pool.

Strengths and weaknesses of ECN models

With “real” ECN brokers this is different: With this market model the broker has no economic interest in the prices and the execution of orders is carried out according to fixed and publicly visible execution rules (“Matching Rules”). For the operating result of the broker, it is of no direct relevance whether prices are quoted at 0.1 or 3.0 pips spread – especially since this is beyond his power to shape the market anyway.

The only business interest of an ECN Broker is the execution of the largest possible order volumes, as this reduces the unit costs and increases the revenues through commissions. Conflicts of interest between broker and customer do not exist with ECN “in pure form”.

“ECN” NOT ALWAYS ONLY IN ITS PURE FORM

Nevertheless, even ECN market models are not free of weaknesses. The biggest one is that ECN is not always necessarily available “in pure form”. Brokers could, for example, forward some of the orders to the network and execute some of them themselves as market makers. This practice is known from STP brokers: Some brokers of this type do not forward orders below a certain size, in certain currency pairs or at certain times of day to the bank pool and instead execute them in-house.

HOW TO RECOGNIZE DUBIOUS ECN BROKERS

Brokers are reluctant to reveal such details about their market models and hide them behind inconspicuous formulations or structures. “Suspicious” with regard to a hybrid market model are, for example, brokers who “can provide additional liquidity beyond that provided by the network”. You should also take a close look if a broker operates an additional branch and this stands out from the main offering through lower capital requirements for orders and account openings. It is possible that customer orders are first cleared internally and then forwarded to the ECN.

For which traders are ECN brokers the right choice?

ECN brokers tend to have higher capital requirements than market makers and most STP brokers. This applies to both the minimum deposit required to open an account and the minimum order size. While market makers open trading accounts starting at a few hundred Euros, most ECN brokers require 5,000 Euros or even five-digit amounts as minimum deposit.

Nevertheless, the target group of ECN brokers is not primarily distinguished from the target groups of brokers with other market models by an exposed financial strength. ECN Brokers are the right address for traders who are aware of the risks associated with conflicts of interest and wish to limit the role of the broker in trading to that of a service provider with a clearly defined radius of action.

The explicit costs in ECN trading are not mandatory, but often cheaper than with other types of brokers. The costs are made up of the spreads of the marketplace and the broker’s commissions. Necessary condition for low trading costs is an ECN with strong liquidity and a broker with a fee model that fits your trading habits.

Will MTFs become the new ECNs?

Technically speaking, ECN market models are not limited to foreign exchange trading: Market participants connected to a network can trade stocks, commodities, bonds etc. via an ECN instead of liquidity in different currencies. A well-known example of this is today’s Tradegate stock exchange in Berlin, which in 2001, as Tradegate AG’s ECN, was the first German network of this kind.

However, ECN Brokerage has not established itself in the business with private customers outside of FX trading. The best possible off-exchange market model here is trading CFDs via a DMA model, in which the prices correspond to those of a reference exchange or are derived from them according to fixed rules.

It is possible that Multilateral Trading Facility (MTF) systems will gain in importance in the future. MTFs also bring together supply and demand via networks with execution rules. Unlike “classic” ECNs, however, MTFs are subject to stricter regulation by the EU Markets in Financial Instruments Directive (MiFID). In line with this, the German Securities Trading Act lays down rules for the admission of market participants to the network, execution rules and price transparency, among other things.

Quality criteria for ECN brokers

If you have chosen ECN as your market model, you should not compromise and insist on ECN Trading in its purest form. Hybrid market models, where part of the orders are executed in-house or otherwise outside the network, are not ECN trading and are more sensibly compared to STP and market making.

“Genuine” ECN is only valuable if liquidity on the marketplace is consistently high, without this being guaranteed only by contractually agreed interventions by individual participants. High liquidity is a necessary condition for trading with narrow – in the best case none – spreads. In order to keep trading costs low, a broker’s fee model should fit your typical order habits: If you trade less, flat fees per standard lot are usually cheaper, if you trade a lot, a broker with degressive pricing is recommended.

It is also worth taking a look at the terms and conditions to be certain about the treatment of any margin requirements: some brokers bindingly exclude margin requirements that go beyond the account balance, thereby relieving their customers of the risks associated with sudden events and a sudden increase in volatility.

TRADING COSTS, REGULATION, SERVICE

In addition to trading costs, the legal and regulatory environment, including deposit insurance, should be as sophisticated as possible. As with all brokers, the following applies: EU regulation based on MiFID is better than having a registered office overseas, and a British broker is preferable to one based in Cyprus on this point.

If you have little or no experience in FX trading or have traded with a broker with intensive customer support, you should pay special attention to the service offered: The support of some providers is only available in English and/or is not geared to questions from beginners.

TRADING PLATFORM

The trading platform must also be considered in the comparison with regard to your plans: Is automated trading possible? If so: In which programming language? Does the broker allow scalping? Which order types are available and how good are the charting tool and user interface? Are there webinars with live trading? This list could go on and on – a qualified comparison is more than just listing fees and minimum deposits!

This is how the ECN Broker comparison of Day-traders.net works

Day-traders’s comparison tools support you in your search for a suitable ECN broker. Our ECN Broker comparison is the result of consistent research: For the comparison databases, the trading platforms of numerous providers on the market were examined, as were the terms and conditions of business and customer service.

Day-trader’s comparison includes all criteria that in our experience are relevant for beginners, advanced and professionals when deciding for (or against!) a provider. Based on your typical orders (instrument, size, number), it is easy to determine the most favourable commission model for your purposes. In further steps, brokers are compared based on criteria such as regulatory environment, treatment of scalping and margin requirements, order types, service and much more.

Get rebates and save with Day-traders.net

Day-traders.net enables further benefits: If you open an account with one of our partner brokers with us as a reference, you will receive a discount negotiated by us in return – in the case of ECN brokers, for example, discounts on trading commissions, settlement according to a flatter scale, etc.


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