In the past few years, the forex industry has been experiencing an increase in a new type of brokers known as the Electronic Communication Network (ECN). These brokers are allowing clients to interact with each other or with third parties.
Usually, the minimum amount required for ECN accounts is higher than in regular forex accounts. However, there are a lot of benefits to using an ECN account. For instance, you will be able to lower and scalp the spreads.
Read on to find what ECN brokers are, how they work, the difference between ECN and Standard accounts, and some of the best ECN brokers in the market.
What are ECN brokers?
Electronic Communications Network (ECN) brokers have been becoming very popular in the recent past. They are classified under the non-dealing desk types of brokers together with Straight Through Processing (STP) and Direct Market Access (DMA).
They execute the client’s trades by matching them with other clients and third-parties, who act as counterparties. In contrast, dealing desk brokers serves as the counterparties on the other side of the trade. This creates an apparent conflict of interest, where the client is disadvantaged.
In most cases, ECN brokers charge lower spreads than desk dealing brokers. On top of that, they also charge commissions on trade entries and exits made. However, the combination of both the spreads and commissions charged by ECN brokers is lower than the fees most desk dealing brokers charge. The low cost of trading and the lack of conflict of interest make ECN brokers attractive to most traders.
ECN brokers ask for a higher minimum deposit compared to dealing desk brokers. Most of them require a minimum trade size as high as one mini-lot rather than one micro-lot that is standard in the industry. Nonetheless, they offer excellent execution speeds.
How do ECN brokers work?
ECN brokers get the matching orders they offer their clients from tier-1 liquidity providers that include banks, big financial institutions, hedge funds, etc. These liquidity providers provide the best currency rate. However, the minimum trading transactions are very high for ordinary traders to afford. Also, there is the requirement of an established credit line to trade with them. This blocks out small market players and individual traders from taking advantage of the lower rates.
This is where the ECN brokers shine by bridging the gap between the tier-1 liquidity providers and small participants in the market. Since quotes come directly from liquidity providers, these brokers will allow you to access exclusive interbank rates.
Most ECN brokers incorporate a program that brings participants together and automatically execute orders matching in real-time. When orders are made, they are matched with opposite orders of the same amount and volume. Note that you are not trading with the network itself or dealing with a single entity. Instead, you are dealing with numerous liquidity providers
This concept involves algorithms and matching engines to execute orders and perform limit checks in a matter of milliseconds. Although the spreads are flexible, the competitive environment creates 1 to 2 pips on most currency pairs.
What is the difference between ECN and standard account?
The main difference between an ECN and a standard account is the execution method and the fee policy involved. In an ECN account, clients trade with each other and other third-parties. However, in most standard accounts, the broker acts as the counterparty, which brings a major conflict of interest.
Moreover, when trading with an ECN account, you will be required to pay a fixed commission for every order you make. The good thing about a standard account is that there are no commissions nowadays. One thing that has made ECN accounts popular is the tight spreads. The spread is determined by the types of buy and sell price and the market itself. As a result, sometimes you can get spreads at breakeven point. However, it can change depending on various factors, such as a news event. On the other hand, standard accounts have fixed spreads.
What is a real ECN broker?
Due to the increased popularity of ECN trading, more brokers are claiming to be ECN brokers or offering ECN-type accounts to ride on the wave. However, there is a controversy about whether they are real ECN brokers.
A real ECN broker is a type of broker that put your trade orders in a network where it is automatically matched with a similar order of the same amount and volume. The whole process of matching orders only takes a few seconds. If a broker is claiming to be offer ECN trading and does not use this method of order execution, they are almost certainly not. Also, the broker is probably not an ECN broker if the order execution is very slow.
Another complex issue arises concerning what qualifies as a liquidity provider in ECN trading. As mentioned above, ECN traders source their orders from tier-1 liquidity providers. It is not a surprise that most brokers who advertise themselves as ECN brokers do not indicate which liquidity provider they are using.
Best true ECN brokers
- com- Best overall
This is one of the leading forex brokers in the world. It is regulated by top financial authorities such as the US Commodity Futures Trading Commission (CFTC), Financial Conduct Authority (FCA), and the Investment Industry Regulatory Organization of Canada (IIROC).
Forex.com is one of the few brokers that offer state of the art ECN platform dubbed as GTX direct. However, it is aimed at a high worth individuals with a minimum deposit of $100,000. Nonetheless, you will benefit from tighter spreads.
It offers three trading platforms that include the Advanced Trading platform, Web Trader, and MetaTrader 4. Although it does not charge deposit or withdrawal fees, there is a $15 monthly fee for inactivity. Trading fees and maximum leverage will depend on the activity and the account type you are using.
Pros
- State of the art ECN platform
- Regulated several regulatory agencies
- Free deposit and withdrawal
Cons
- A High minimum amount for ECN account
- FXTM- Offer a low minimum deposit
FXTM is a well-established broker established in 2011. It is regulated by several agencies such as the Financial Conduct Authority (FCA), Cyprus Securities and Exchange Commission (CySEC), Financial Sector Conduct Authority (FSCA), and Financial Service Commission (FSC).
Register on FXTM to take advantage of the featured-filled ECN Zero account without any commissions charged. The most appealing feature is the low minimum deposit of only $50. You will access over 90 forex currency pairs with a starting spread of 01.pips.
Pros
- Low minimum amount
- No commissions charged
- Low spreads
Cons
- Some withdrawal options are charged
- Pepperstone- offers multiple trading platforms
Founded in 2010, Pepperstone has enjoyed a remarkable growth rate to become a major player in the trading industry. It offers a wide range of trading platforms such as MetaTrader 4, WebTrader, cTrader, and mobile app. Notably, it is among the few forex brokers that offer ECN trading.
Pepperstone is a safe broker because it is regulated by the Australian Securities and Investment Commission (ASIC) and the Financial Conduct Authority (FCA). Also, the client’s funds are segregated in trust accounts with tier-1 banks.
To open an account on Pepperstone, you will need a minimum deposit of $200. The platform offers a leverage of up to 500:1 in ASIC jurisdiction, 30:1 in FCA jurisdiction, and 50:1 in DFSA jurisdiction.
Generally, Pepperstone fees are low compared to other brokers. For instance, it does not charge a deposit fee. Fortunately, it supports a wide range of payment methods, including bank transfer, credit/debit card, PayPal, etc. Also, there is no inactivity fee, and withdrawal is only charged for bank transfer.
Pros
- Offers ECN trading
- Regulated by reputable agencies
- Low fees involved
Cons
- Limited educational resources
- Hotforex- The best broker for Asia
Hotforex was voted as the best broker for Asia in 2012. It was established in 2010 and has grown to become a reputable broker. It offers six account types to cater to a wide range of traders, and pricing is better compared to its competitors.
One of the major points of attraction for traders is the ECN account and a minimum deposit of only $50. Also, it offers super-tight spreads form major liquidity providers. Commissions start as low as $0.03 per 1K lo. In addition, Hotforex is regulated by various authorities such as FCA, CySEC, FSCA, DIFC, and SFSA.
Pros
- Regulated by multiple agencies
- Low commissions
- Super-tight spreads
Cons
- Does not allow scalping
- Admiral Markets- best for advanced analysis tools
Established in Russian, Admiral Markets later transferred to London. It is regulated by the Financial Conduct Authority (FCA) and the Australian Securities and Investment Commission (ASIC).
This broker offers various account types, including the ZeroMT4, that is based on the ECN technology. It is designed to facilitate both high frequency and high volume traders. The spreads are as low as 0pips, and orders are sourced from leading liquidity providers. However, the minimum deposit is on the more upper side at £1000 or equivalent.
Pros
- Funds are segregated in top-tier banks
- Regulated
- Low spreads
Cons
- Charges inactivity fee
Conclusion
Due to the increasing number of ECN brokers, it is difficult to choose the best option. The fact that some traditional brokers have started offering ECN trading complicates the matter even further. In this article, we have explained the meaning of ECN, and some of the best brokers and accounts.
Frequently asked questions (FAQ)
- Is there a difference between a regular account and an ECN account?
The only difference between an ECN and a standard trading account is the order execution method. In ECN trading, clients act as counterparties while in standard accounts, the broker is the counterparty.
- Which is better between ECN and STP?
This will mainly depend on the quality of service offered, and the liquidity of the market traded. However, ECN accounts are better because they offer tighter spreads.
- Is there a pure ECN broker?
Yes. It is a type of broker that uses an order-matching execution mechanism.