ECN is the acronym of Electronic Communications Network, and forex brokers connect via these networks to match their client’s trading orders directly with other market participants.

    ECN brokers are intermediaries connecting forex CFD traders via an electronic communications network to a pool of liquidity providers, normally, banks.
ECN Brokers

The edge, in principle, of trading with an ECN forex broker, is the direct access to the foreign exchange market, without a middleman.

The distinguishing feature of ECN brokers, when compared to market makers brokers, who operate a dealing desk model and are taking the opposite side of their client’s trades, is that, with an ECN broker, there isn’t an intrinsic conflict of interest with their clients.

Unlike market makers, who make their profits on their clients loses, ECN brokers make their profits every time their clients trade, by charging an execution commission.

ECN Brokers Main Features

Features ECN Brokers ECN Modelling Brokers
Small initial deposit
High leverage available
Micro lots (0.01)
Mini lots (0.10)
Low spreads
Commissions
Fast execution

A forex ECN is a trading system allowing the routing of an order from one trader to another member of the ECN network. The forex ECN eco-system was originally developed as a network, connecting, and pushing, orders to the market.

One of the many features of the ECN network is the impossibility of interference with these orders, or with the market spreads from the liquidity providers. Thus, ECN brokers can only make a profit, mainly, from their commission fees.

    When an ECN forex broker routes orders to the FX market's liquidity providers, the quoted prices (the highest bid and the lowest ask) displayed on the broker trading platform, are not from the broker itself, but from the liquidity providers.

Many CFD brokers often advertise they provide ECN accounts, but in reality, they don’t. What they offer is an ECN pricing model account. In this case, orders are not passed to the underlying FX market, where the big banks and the investment firms wage war to each other’s, every minute, and every second, of the trading sessions, exchanging, not mini-lots of 1,000 units of a currency, on a 500:1 leveraged account, but contracts worth millions and millions of dollars.

The not-so-true-ECN-broker might be quoting the prices from the ECN network, but this broker is not an ECN broker, it is in reality an STP (Straight Through Processing) broker, basically the middleman between the traders and the liquidity providers.

The STP brokers negotiate the trading positions with the liquidity providers. They will then gather several retail trades, in a block, and place it with a liquidity provider willing to take the trades from those retail orders. And sometimes, these secondary LPs can also be market makers brokers!

 TIP  The main differences between a real ECN broker and a broker offering ECN type accounts are the high deposit requirements and the minimum position size, all related to the high services charges of the ECN network.

Since operating in the ECN is an expensive venture, in terms of fees and charges, an ECN broker offering a direct trading channel between investors and liquidity providers, will have high-service fees to pay as well. That’s why ECN brokers usually demand larger initial deposits when opening an account and offer smaller leverage ratios.

The other main difference, always related to the high service costs of operating via the ECN network, is the minimum position size, a requirement imposed from most liquidity providers. These important market players often have a minimum position size of 0.1 lot (10,000 currency units); thus, traders cannot open smaller positions (0.01 lot = 1,000 currency units).

Also, since ECN brokers can’t interfere, or make a profit, with the spread (the highest bid and the lowest ask from the liquidity providers), they have fixed commissions and fees for each transaction. And usually, those commissions and fees are considerably large, as it is the only source of income of an ECN broker.

So, if you are really keen on trading with a true ECN FX broker, it is important to identify who are the real ECN brokers that can operate solely (and without any further interests), as intermediaries between traders and the real market.

Advantages and Disadvantages of ECN Brokers

Advantages of ECN Brokers

  • Deep Liquidity: ECN brokers give their clients direct access to the market and deep liquidity pools, where the key players, banks and other financial firms, operate.
  • Lower Trading Costs: ECN brokers connect traders directly to the best market quotes and to the most competitive spreads (highest bid and lowest ask), often 0.0 pips.
  • No Conflict of Interest: ECN brokers do not trade against their clients, instead they facilitate the direct access to the market and to the institutional liquidity providers.

Disadvantages of ECN Brokers

  • Guaranteed Execution: Due to the characteristic high-volatility of the forex market, slippage (positive and negative) can happen when trading with an ECN broker. This means that a limit, or a stop order, might be filled at a different price than set. It also means that stop-loss levels are not guaranteed.
  • Small Account Deposits: Most ECN brokers require larger deposits to open an ECN trading account. This is related to the high costs and services fees of the ECN network.
  • Small Position Size: You need money to make money. Again, related to service costs of the ECN network, most liquidity providers impose a minimum position size of 0.1 lot (10,000 currency units). This means trade sizes of mini lots of 1,000 currency units (or even nano lots) are commonly not available.
  • High Leverage Ratios: ECN brokers are supervised by tier 1 regulatory bodies and follow strict rules regarding leverage ratios. It is common for ECN brokers to limit the available leverage to 50:1 for retail investors.

ECN Account Type Brokers

As the ECN trading modelling is far more attractive to retail investors, with lower trading costs, several retail FX brokers market themselves as ECN forex brokers.Unfortunately, there are several brokers taking advantage of this, and they are just using the ECN modelling as a marketing strategy to attract new customers.

These brokers are not true ECN forex brokers, but only ECN pricing model brokers, proposing ECN accounts type, with a lower spread, plus trade commissions.

But the underlying difference is that the trading activity is not passed directly to the main liquidity providers on the ECN network, but instead, these ECN forex brokers will act as the middlemen to the liquidity providers, or, the trading activity can actually occur on the broker’s own pool of liquidity.