ECN Brokers – Better or Worse than a “Regular” Broker?

If you are relatively new to forex trading, you may be wondering if an ECN forex broker is a better choice than a traditional ‘market maker’ broker. It may well be, but it depends on your circumstances and what you need from your forex broker. Today we will look at how an ECN broker works and what aspects of such a broker may make it better or worse than “regular” brokers.

What is an ECN Forex Broker?

ECN forex brokers use an Electronic Communications Network to provide their clients with price quotations and trading opportunities. Through an ECN, the broker puts various market participants in touch with each other and allows them to buy and sell currencies and other assets.

ECN brokers operate a Straight Through Processing (STP) trading model and do not have a Dealing Desk. If you sign up with a true ECN broker, you will find that the broker does not interfere with the trading process.

Instead, ECN forex brokers usually match each order at the best price currently available from other market participants or their other liquidity providers. This means that spreads are kept low, and at times some ECN brokers can offer spreads from as low as 0 pips. Obviously, every broker needs to make money, and an ECN brokerage achieves this by applying a commission charge to every transaction.

The alternative to an ECN broker is known as a market maker brokerage, and these operate on a somewhat different model. As the name implies, market makers basically “make” the forex market on top of the real market, meaning that the orders placed by traders using the platform rarely actually reach the underlying forex market.

Unlike the ECN broker, who feeds orders directly through to a liquidity provider offering the best price, a market maker is incentivised to provide you with a set price, which is not necessarily the best option available. Because market makers act as the opposite party in each forex transaction, in terms of pricing, they are effectively taking the other side of each trade that their clients make.

When you, as a trader, are selling via a market maker brokerage, the broker is buying from you, and vice versa. While there are a few pros to using a market maker, one big drawback is that they are simply not incentivised to give you the best possible price, at least not like an ECN broker.

How Does an ECN Broker Work?

ECN brokers do not pass on order flow to market makers. Instead, they match participants in a trade and pass the orders to liquidity providers. An ECN broker facilitates the buying and selling of currency pairs for interested investors across the network.

The broker effectively matches up trades so a seller will always find a buyer and vice-versa. By acting as an exchange and consolidating price quotations from a number of different market participants, the ECN broker can generally offer its clients better spreads than traditional forex brokers.

The Benefits of ECN Brokers

Top ECN brokers offer an excellent and fair pricing model and technology that provides high-speed execution. That means they can offer increased pricing transparency and lower spreads while often eliminating slippage and re-quotes by providing the fastest possible trade execution.

With an ECN broker, trades feed straight through to the best prices available on the open market without interference from a “market maker” who has an incentive to build its profit into the trade and, therefore, into the spreads offered. True ECN brokers do not make or set prices, so there is little risk of price manipulation.

This means that trading can often be cheaper with an ECN broker, although they do, of course, have to charge a commission to make a profit. Many traders, however, find a small commission and a tight spread found at an ECN broker keeps their trading costs lower than at a traditional broker.

The Drawbacks of ECN Brokers

Although many traders prefer an ECN forex broker, there are also ways in which a market maker model may be better. Market makers do not have to rely on outside liquidity providers and are always willing to sell or buy, provided the trader is willing to pay or accept their price. In this way, they create liquidity and contribute to the efficiency of the forex market.

One reason some traders do not like ECN brokers is because of the commissions charged on each trade. Traditional market maker brokers often offer trading with no commissions, so all profits come from the spreads, making the price per trade potentially easier to calculate. While ECN brokers are usually cheaper, this is not always the case. Depending on the broker and the market conditions, traditional brokers can also be an inexpensive way to trade.

Price movements can also be less volatile with some market maker brokers, and barriers to entry may be lower. You may find that a traditional broker has a lower minimum deposit requirement and offers smaller lot sizes than ECN brokers, making trading more accessible for retail clients. However, ECN brokers are likelier to have a higher deposit requirement and may not offer very small lot sizes.

Also, although there is some conflict of interest involved in the market maker model and some disreputable brokers who will take advantage of this, intense competition amongst forex brokers makes artificially inflating market prices and spreads much less likely than it might seem.

The Safest ECN Brokers

If you are looking for an ECN broker, check out our table of top-rated ECN forex brokers below.

Genuine ECN forex brokers do not interfere with the trading process at all, simply providing the network that facilitates trading between market participants, allowing traders access to the real forex market. Their pricing model is transparent and fair and generally tends to be cheaper than a regular market maker broker.

However, there are reasons that some retail clients might prefer traditional brokers, including the fact that they may cater better for beginner traders, offering smaller lot sizes and requiring lower deposits to open an account. Overall, however, it is safe to say that for serious, high-volume traders, the advantages offered by an ECN broker far outweigh the disadvantages.