All You Need to Know About ECN Forex Trading

How would you like a broker that only makes money when you win, a broker that wants you to succeed because they make profits exclusively when your trades are winners?

For this singular factor and when compared to market maker brokers who profit from your trades whether you lose or win, ECN Forex brokers are becoming the in-thing for South African traders.

Sounds fantastic right? South Africans are beginning to explore this FX trading option and truly loving it too. That’s one of the amazing beauties ECN brings to the table and it explains why so many traders are flooding to such brokers.

The Electronic Communications Network, or ECN, has changed the way folks trade currencies in the Forex market, putting the power in the hands of small traders and allowing them to trade with utmost flexibility.

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What Exactly is the ECN?

Sometimes referred to as alternative trading networks or alternative systems, the Electronic Communications Network (ECN) is a link – think of it as a bridge – that connects small individual market participants with the liquidity providers through Forex brokers that operate ECN exchanges.

In simpler terms, the ECN trading option allows you, while lounging in your pyjamas on your bed somewhere in Cape Town, to connect with the big liquidity providers who accept your buy or sell orders without the need of any stock exchange clearing house as an intermediary.

In effect, your orders are filled instantly once you click the button and you can see your trade go live before you blink your eyes twice. This speed of execution and low commissions make ECN trading very attractive to small traders.

In other words, it is the best way to trade Forex today because of its many benefits.

How Does an ECN Forex Broker Operate?

How does ECN Forex work?Although not all Forex brokers offer ECN trading accounts at the moment, there is no doubt that this would change soon because that is the future of FX trading. On the list of FSCA (FSB) regulated brokers licensed to operate in South Africa, you are sure to find quite a number of them who offer this unique trading mode.

The ECN system works by pulling together all the buy and sell orders for a particular pair of currencies into a single pool. So, when you place your own order, the system searches for available counter-trades that matches your order – in full or in part – and links you to that third party in a fraction of a second.

Stocks and currencies are the major items traded in this manner using this system, matching limit orders instantly so that there is no idle time or lack of orders to buy or sell, 24 hours daily – on weekdays.

The job of the ECN FX broker is mainly to put together buy or sell quotes from multiple participants interested in that particular pair and that results in a tighter bid or ask spread. Therefore, all buy and sell offers for that pair is fed automatically into the system, waiting for a trader like you to pick a side that guarantees you the best possible price offer at that moment.

One of the major differences between an ECN broker and a market trader is where they pitch their tent on your side when you initiate an order. While an ECN broker would only make profits when you win, the market trader takes the opposite side of your order, profiting whether you win or lose.

This factor makes it easy for ECN trading brokers to offer tighter spreads and charge fixed commissions that are quite competitive and sometimes, negligible.

The ECN broker is the link between you and the liquidity provider who does not profit from your spread difference but charges a tiny commission on each trade. This could be as low as a fraction of a cent and largely inconsequential. Consequently, the more orders you execute that results in a win, the more money they make.

How to Choose the Best Trading Broker?

It is not enough to understand ECN Forex trading and picking, at random, one of the many brokerage firms licensed to offer such services to South Africans, you must always do your due diligence, investigate the company, and make certain they can deliver before investing your hard earned money.

  1. Are they licensed to offer ECN brokerage services? – The Financial Services Conduct Authority (FSCA) of South Africa – formerly called the Financial Services Board (FSB) is saddled with the sole responsibility of making sure that every Forex broker operating in SA has the capacity and technological backbone to link traders with liquidity providers internationally. Be 100% certain that the FSCA regulations are adhered to by the firm before doing business with them.
  2. Do they offer variable or fixed spreads? – Ideally, a good ECN broker would offer only variable spreads, otherwise called floating spreads. In other words, the perfect ECN brokerage company would not offer fixed spreads but spreads that vary depending on market conditions and the volume you are trading at that particular moment.
  3. Do they operate a dealing desk? – This is one of the simplest methods to use so as to determine if the broker is truly offering ECN services. A dealing desk is usually used, among other things, to adjust spreads during volatile news reports. To be sure, open a demo account and watch the difference in pips when there is major fundamental news in your live news feeds, then compare the same instrument at normal market conditions. If the difference in pips is the same, then that is a true ECN broker. The reverse is the case if the difference in pips is not the same under those two conditions. Now that you know what ECN is and what brokers who deal in such a service offer, it’s time to find out if trading through ECN brokers is better than traditional brokerage services.

What are the Advantages?

  • Automated trading and market data feed – This is quite important for those using customized algorithms and Expert Advisors. Working with an ECN broker, you can easily connect your models and risk management systems to the live feed, seamlessly linking the market data in real-time.
  • No re-quotes from dealing desks – The instant nature of trades make ECN Forex very attractive. Since there is no dealer acting as an intermediary, your orders get filled and confirmed automatically at the best price of the moment and in a fraction of a second.
  • Neutral pricing and anonymity – Trading with an ECN Forex broker gives you the edge in terms of neutral pricing. Because your action is anonymous, there can be no bias with respect to current market positions, your strategy, or tactics. It’s all smooth, reflecting real-time market conditions always.
  • No fixed spread – Because market prices constantly fluctuate, reflecting the demand and supply, volatility, and other market conditions of the currency pair, an ECN broker cannot operate with a fixed bid/ask spread. But like almost every other thing under the sun, where there are advantages there are demerits too.

What are the Disadvantages?

  • Step up on your maths – First and foremost, note that you might find it a bit tricky to calculate your stops and targets when trading on an ECN broker platform, thanks to the variable (or constantly moving prices) spreads the broker offers.
  • Possibility of experiencing slippages – Also, even with your stop loss in place, you could also experience slippage because there are constant movements that influence price ticks. This is even more common when sessions overlap – like switching from the London to New York session, etc.
  • Scalpers beware! – One more disadvantage that is worth mentioning is the commission charged. Though quite small when compared with market maker brokers, it can quickly accumulate and become a headache for traders whose strategy involves scalping. For every single trade you execute, they charge you a small part as commission.

So, if you intend placing dozens of trades daily, you might want to consider this before going ahead.

Quick Tips

Quick TipsWhen satisfied that you’ve found a good and responsible ECN broker, try opening a demo account and then another demo account with a market trader kind of broker. Compare both in real time to see the differences as the market moves. You’ll notice the similarities and differences in no time.

Furthermore, be mindful of how fast they execute orders, how seamless the trade is, and how liquid their offers are. Combined, these three factors determine how fair the price you are buying or selling at would be.

Lastly, but very importantly, too, do not make any deposits until you have read and understood the terms and conditions. Commonly, the details are always hidden in the fine prints. Do not be in a hurry to tick the “Agree” box without knowing what you are “agreeing” to.

This is crucial because the conditions of service, prices, and rules differ from one broker to another.

Last Words

It is very evident, so far, that ECN is the future of Forex trading and that explains why many market maker brokers are offering that service on the side too. Even with two or three drawbacks, the many advantages make it more attractive than its predecessor.

In any case, ensure that you only trade with an ECN Forex broker that is licensed and regulated by the FSCA!