STP brokers, ECN brokers, Dealing Desk (DD) brokers, and other types of brokers all offer trading services and products to their clients in the forex market. STP (regular) brokers can be thought of as the intermediaries between buyers and sellers of liquidity (companies that offer trading assets). Visit mex.ae
ECN brokers avoid interfering in the relationships between liquidity providers and traders by connecting them directly. The term “ECN” stands for “Electronic Communication Network,” and brokers who employ this system serve as platforms for traders and financial institutions to interact directly.
The fact that ECN brokers combine a variety of price offerings (quotes) from various liquidity providers is one of their key characteristics. By doing this, a platform is created where traders can select the bid and ask prices that are best suited to their interests and minimize spreads as much as possible. Additionally, brokers typically use commissions to support their service rather than take those spreads for themselves.
ECN brokers hardly ever interfere with the trading between the two parties because traders and liquidity providers are connected directly. And if the technical setup is sound, trading operations start right away. Brokers are also prohibited from trading against their clients.
However, there are a number of drawbacks to using ECN brokers. For instance, ECN brokers typically have very high initial deposit requirements, fixed commissions for transactions, and do not offer micro-lots to their traders.
Trading without middlemen
When people start trading, they require a variety of businesses that offer trading assets. These businesses are referred to as liquidity providers, and they are the ones that enable trading.
However, traders and liquidity providers frequently don’t have direct communication with one another. As an alternative, intermediaries join the two parties and bring them into a single workspace.
The term “STP or Straight Through Processing brokers” refers to these middlemen. All but the trading assets, which are provided by liquidity providers, are almost entirely provided by STP brokers. But more importantly, STP brokers negotiate trading positions with liquidity providers rather than traders.
ECN meaning
Although STP brokers are more prevalent in the forex market, this does not preclude traders from directly contacting liquidity providers. They can choose ECN brokers who will connect them without interfering if they want to have a direct connection with them.
Forex ECN broker
Brokers that use ECN, or electronic communication network, provide constant communication between traders and liquidity providers. Additionally, they don’t get in the way of negotiations or agreements when they link one side to another.
For a variety of liquidity providers, including major commercial banks, funds, and others, ECN brokers serve as a sort of hub. All of the price quotes (offerings) from these various providers are represented and made available to traders on a single platform.
The benefits of ECN trading
ECN trading and direct communication with liquidity providers have a number of benefits. Here are a few examples:
- lower ask prices and higher bid prices
- narrower spreads
- Better liquidity and direct trading
- Executions of trades right away
- Trading against clients is not permitted by brokers.
ECN markets present more compact bid-ask spreads
ECN brokers, as we previously mentioned, serve as hubs for various market participants engaged in Forex trading. These participants may include commercial banks, hedge funds, or other parties. Additionally, this indicates that ECN brokers combine all of the bid and ask price quotes from those participants.
Additionally, this “hub” will inevitably contain both higher and lower bid/ask prices due to the large number of players congregated there. On the one hand, there will be liquidity providers with wider spreads due to their lower bid prices and higher ask prices.
On the other hand, there will undoubtedly be those who have tighter spreads due to higher bid and lower ask prices. Additionally, traders have the option to buy currency pairs at a discount from one liquidity provider and sell them at a premium to another. That is the ease of use provided by ECN networks.
Market executions directly
The fact that ECN brokers don’t interfere with interactions between traders and other market participants is another crucial and advantageous feature of these brokers. This means that, in contrast to STP brokers, who track traders’ positions and negotiate them directly with liquidity providers, ECN traders can directly negotiate their trades with market participants under the most advantageous terms.
This implies that a trader won’t have to wait until their broker negotiates the position with the liquidity provider when they open a position for, let’s say, the EUR/USD pair for one lot. Instead, they can handle it independently and engage in negotiations with the most appropriate EUR/USD provider represented on the platform.
Because there is no middleman between the trading parties, assets are also very liquid. This implies that there won’t be much of a wait time between a trader and the liquidity provider they’re partnering with to buy or sell currency pairs.
ECN vs. standard accounts: trading against clients
The following aspect is related to trading against clients’ positions. STP brokers frequently open positions that are exactly the opposite of those that their clients have placed. For instance, when a trader opens a long (buy) EUR/USD position, the broker will also open an identically sized short EUR/USD position when delivering that position to the liquidity provider.
Because they can earn larger payouts by trading against their clients, many STP brokers engage in this activity. For instance, in the case of the trade mentioned above, if the trader loses, the broker will receive a payout. However, if the trade is a success, the broker will incur a loss.
ECN networks, however, were not designed to transmit traders’ positions to the liquidity providers, as we already mentioned. Instead, traders handle that on their own. Because of this, brokers are unable to oppose their clients’ positions.
Negative aspects of ECN markets
For the reasons we have outlined above, trading forex with ECN brokers is advantageous. But that doesn’t mean there aren’t any drawbacks. Many traders will decide against using ECN brokers due to the high service costs, commissions, and other factors. So, the following is a brief explanation of those drawbacks:
High deposit requirements: ECN brokers charge high service fees because they enable direct communication between traders and liquidity providers. They typically require larger initial deposits to open the account because of this;
No micro-lots; these have expensive service costs and strict requirements from liquidity providers. The minimum position size for those market participants represented on this platform is frequently 0.1 lot (10,000 currency units). Trading therefore is not permitted for 0.01 lot (1,000 currency units);
Fixed commissions: ECN brokers typically don’t accept spreads as payment for their services, so they have set commissions and fees for each transaction. And typically, those commissions are hefty, demonstrating once more that even though the market share for FX ECN is not very large, costs are still quite high.
