The main idea of bulding an ECN system is to create a technology that allows transactions to be made without the involvement of intermediaries as much as possible, and ECN accounts provide an opportunity to connect market participants among themselves directly, bypassing intermediary services, such as Forex brokerages.
ECN stands for Electronic Communication Network, a network through which customers are directly connected with liquidity providers, without involving a broker in the trading process itself.
On the forex exchange markets, this system gained fame in 1999, when the first Currenex network announced itself. Its principle of operation minimized the role of any intermediaries in the trading process. Forex brokers, also constantly engaged in attracting new customers and searching for innovative ideas, began to provide access to ECN-accounts. It should be noted that not every brokerage company can afford an ECN platform, since such developments are expensive. Some brokers create a combined version of Metatrader 4/ECN, declaring it a full-fledged ECN trade, which is actually not true in principle. Such a product, similar to the modified MetaTrader4, is very unstable. And only a true ECN broker is good for scalping.
The indisputable advantages of these systems include:
- Participants are provided with all the necessary data instantly
- Transparency - all the participants’ orders, transmitted through the electronic network, enter the market, having some influence on the dynamics, allowing competing with other brokers. All incoming orders are immediately reflected in the system and become known to the participating subscribers. Moreover, orders enter the market on behalf of ECN, that is, an impersonal broker with the status of a market maker, whose clients make a huge number of transactions among themselves.
What an ECN account gives to a trader?
The modern brokers have the task to make sure that they are not forgotten by customers, and, in addition, introduce themselves to new customers in the most favorable light, and an ECN account provides an excellent opportunity for this:
- ECN-account is an instant order execution
- ECN-account is remarkable for the absence of requotes.
- ECN account is characterized by minimal spreads.
When using an ECN account, there are no Limit / Stop Levels, that is, there is no limit to the Minimum distance between the current price value and pending orders, which makes it possible to trade inside the spread.
Traders' usage of their trading methods and strategies is not limited; scalping-trading (pipsing) is possible. The order placement goes directly to liquidity providers.
What is an ECN account?
As mentioned above, in the foreign exchange market, sellers and buyers place their applications, from which the ECN system is formed. The prices offered by the participants differ by the amount of spread, which, in turn, may vary when prices change.
The advantages of ECN are such moments:
- the ECN broker receives profit not from the spread to a greater extent, but through its commission are received from transactions;
- there are no requotes, the execution of orders on the network is instant at the price requested by the trader or the best that is present on the market;
- prices are formed at the suggestions of participants - sellers and buyers.
Forex ECN Account
Trading with MetaTrader essentially departs from the reality that takes place in the financial market. The trader tries to catch the moment of strong quotes movement and quickly manage to get some profit with scalping. He receives profit from the broker, and he transfers the loss to him.
As for real Forex, it is more consistent with the principle of auction on the exchange. Similar to the exchange, there is a “glass of applications”, which is a single base where all applications are accumulated. All data on the price and volume of orders in an accessible form are transmitted to the trader who can see the plans and desires of other trading participants and he forms his application. A “glass of applications” is an important tool for analyzing the market situation. When the glass contains an excess of the volume of applications for sale over applications for the purchase, it’s pretty confident to talk about the impending drop in quotations and make the right decision and position on Forex. If buyers prevail in the market, then joining them, you can earn money on the growth of quotations.
It can be argued that using an ECN account on Forex is work in the real market, therefore, more and more traders prefer ECN, leaving aside the honesty of brokerage companies.
Undoubtedly, the process of working with an ECN account is more complicated compared to MetaTrader, but its obvious advantages outweigh these problems.
For organized trading, there are a number of ECN sites that are interconnected by the synchronous movement of quotes. Only serious brokers are allowed into this serious system of international level, and the broker’s ability to create and open an ECN account already speaks of its reliability. The broker shows customers the real market quotes, it cannot influence what will be transferred to customers.
Using an ECN account eliminates haste and makes the course of trading focused and thoughtful. After the trader places an order, it enters the queue, waiting for execution. When the market reaches the price level that has been declared by the trader, it will certainly be executed at the price declared by the trader without slippage.
Trading on ECN accounts makes trading cheaper. Traditionally, the Forex broker has earnings on spreads, maintaining the difference between the prices of buying and selling currency. When trading, such a system significantly adds a headache to the trader, since the correction for the spread value must be either constantly kept in memory or the terminal settings should be adjusted. Spread is a variable value, changing endlessly. The spread causes the biggest problem for earning when scalping, absorbing that small profit, which is the basis of pipsing. It turns out that before making a profit, the transaction must first pay off the spread. Therefore, for a trader, such a broker fee in the form of a spread becomes an expensive pleasure. For an ECN account, the broker's fee is presented by a brokerage commission, which is standardized and, as a fact, predictable, and ultimately the costs will be lower than the costs of the spread. Naturally, the fees for different companies differ, but, as practice shows, the fee is still cheaper than trading with a spread.
Signs and differences of an ECN-Broker:
- Availability of access to the main systems using ECN: the most popular Currenex system now, as well as IntegralFx, LavaFx or 360Т.
- The execution of orders is Market Execution, which means that the time it takes to open an order is a few milliseconds. For comparison, for standard accounts this value can go up to several seconds.
- The availability of a “glass” that reveals all the orders of participants in the ECN electronic network, starting from the largest banks to small market players.
- The ability to change the spread. What does it mean? When opening an order inside the spread, the trader sets a new spread, where the opening price will change one of the borders. A small example will help to understand this. Let's say the pair EUR / USD is considered and the spread is 3 points 1.4905 / 1.4908. The trader sets Limit Buy - 1.4906, then the quotes for this currency pair will become 1.4906 / 1.4908 and remain so until the order is executed or other offers appear.
- An ECN broker must give a trader the possibility to know their counterparty by order. That is, Bank Of America and Deutsche Bank may be your partner in the transaction.
- ECN accounts are not remarkable for very small trading deposits, but especially large volumes are not required, for example, a deposit for an ECN account with most brokers is $1000. A significant flow of liquidity is provided by the broker not at the expense of volume, but as a result of the quantity, and by the end of the day the bank reduces and processes all completed transactions in accordance with the average price.
- An ECN feature also includes the absence of limits on the minimum time for an operation, that is, there is no ban on scalping. In this regard, each trader has the right to his choice without any sanctions from the ECN broker.
- Another feature of an ECN broker is the lack of requotes. The spread value of such a broker is constantly changing, and the volatility of quotes is very high. On the news, the spread can make a sharp jump in one direction and at the next moment return back, while the range can reach 30 or more points. Such a picture speaks of the reality of the ECN market without smoothing quotes, which brokers often commit and sharp jumps occur extremely rarely.
Undoubtedly, such a modern tool for Forex trading as an ECN account attracts the attention of an increasing number of participants in the foreign exchange market.
Using the ECN model, the trader gets access to the interbank market, where not only other traders, but also banks and various funds will become their counterparties. Moreover, all participants have equal rights. All operations are based on the principle of full transparency.
ECN broker's earning is commission from transactions, which eliminates the opposition of the interests of the client and the broker, so the profitability of trading is beneficial for both parties. The choice of contractors in the system occurs automatically according to a number of criteria and does not depend on the relationship between the parties.
Among the disadvantages of ECN, one can single out a rather high trading deposit and the complexity of the system that requires experience.
In general, an ECN account is a choice of professionals who have worked and earned on Forex for years, and a beginner who is just starting to trade can study this interesting and useful system and start applying it to his trading using all the available educational information and theoretical materials.
