Over the past decade, retail forex trading activities have come a long way, mainly due to the resolve of the brokerage community to act as middlemen between the global interbank market and individuals.
When you look at the nineties era and before, forex trading was limited to large financial institutions, hedge funds, and wealthy individuals. The entry requirement at the time was roughly 1 million US dollars.
Following these conditions, forex brokers learned how to arbitrage their risk from their liquidity providers, aggregate their client orders, and offer bid/ask quotes for smaller lot sizes.
This move ushered in the era of retail forex trading, opening the doors of unlimited opportunities in the forex exchange market. Over time, the evolution of retail forex trading led to the development of ECN brokerage.
ECN (Electronic Communication Network)
ECN is a communication platform that is designed to provide a direct automated channel for transferring trading orders from an individual to a liquidity supplier.
ECN came about from the desire to minimize the number of go-betweens between two market players. Lack of trust and honesty between players called for an effective and efficient solution.
Introduced back in 1999, ECN has made major technological leaps to make itself more accessible to traders.
At present, traders who wish to trade via ECN only require to open a special account with a certified broker. Opening and operating such an account is as simple as opening and operating a regular account.
Who is an ECN Broker?
An ECN broker is a forex financial specialist who utilizes electronic communication networks (ECNs) to service his/her clients. ECN brokers have direct access to other participants in the forex currency markets.
Considering that ECN brokers integrate price quotations from multiple market participants, they generally offer their clients’ tighter and favorable bid/ask spreads.
Given the fact that ECN brokers are only mandated to match trades between market players, they are not allowed to trade against clients. Some unscrupulous retail brokers fall under such allegations.
ECN brokers charge their clients a fixed charge per transaction, given the fact that ECN spreads are much narrower than those of other brokers.
A big percentage of the forex market does not resort to the unscrupulous activities mentioned above, but it is important to take note as the temptation is ever-present.
New and upcoming ECN brokers are taking full advantage of clients’ concerns regarding security and propriety in their advertising activities.
Today, almost every ECN broker assures their clients or prospective clients of their commitment to never trade against them in the background.
How Does an ECN Broker Work?
At present, many believe that ECN is the future of forex trading, mainly because it eliminates long processes and intermediaries in the forex industry.
As for how an ECN broker operates, consider them as a bridge that links the gap between large Tier-1 financial institutions and small retail traders.
The technology that makes the linkage possible is fairly complex and goes by the name of FIX Protocol or Financial Information Exchange Protocol.
A good ECN broker has many connections with major financial institutions and funnels your orders directly to their liquidity providers at the agreed spreads.
ECN brokers make their monies on a transactional and commission basis. The ECN brokers also have no mandate to control the spreads at any given time, rendering them to be accustomed to variable spread pricing.
Trading platforms for ECNs are usually more cumbersome and complex, forcing traders to take some time to get used to the platforms.
For potential traders with large account balances, and high trade activities, ECN brokerage might be the perfect way to go.
For retail traders who have smaller account balances and are unwilling to venture into high-volume trading, the market maker might be a good fit for their trading activity.