What is an ECN Forex broker and what are its advantages?

In Forex trading, there are several types of brokers that provide trading services and products to their clients: STP brokers, ECN brokers, Dealing Desk (DD) brokers, etc. STP (regular) brokers can be considered as the middlemen between traders and liquidity providers (companies that offer trading assets).
ECN brokers connect traders to liquidity providers directly, without getting in the middle of their relations. As for the ECN meaning, the term stands for Electronic Communication Network and the brokers that use this mechanism are platforms where traders and financial companies make direct contact with each other.
One of the main characteristics of ECN brokers is that they combine lots of price offerings (quotes) from different liquidity providers. This creates a platform where traders can choose the most suitable bid and ask prices for their interests and reduce spreads as much as they can. Not only that, brokers don’t usually take those spreads for themselves - instead, they use commissions to support their service.
Since traders and liquidity providers are directly connected, ECN brokers almost never interfere with the trading process of the two sides. And if the technical infrastructure works properly, the trading operation begins instantly. Even more, brokers cannot trade against their clients.
However, there are various disadvantages associated with ECN brokers. For instance, ECN brokers don’t offer micro-lots to their traders, they have fixed commissions for transactions, and the initial deposit requirements are usually very high.

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Trading without middlemen

When people get into trading, they need various companies that provide assets for trading. Such companies are called liquidity providers and they are the ones that make trading possible.
However, in many cases, traders and liquidity providers don’t interact with each other directly. Instead, there are middlemen who connect the two parties and bring them in a single working space.
Those middlemen are called STP (Straight Through Processing) brokers. STP brokers provide almost everything needed for trading, apart from trading assets that are provided by liquidity providers. But more importantly, instead of traders, STP brokers negotiate trading positions with liquidity providers.

ECN meaning explained

While STP brokers are more common in Forex, it doesn’t mean that traders cannot communicate with liquidity providers directly. If they want to have a direct connection with them, they can certainly choose ECN brokers who will connect them without interference.

 ECN Forex broker
ECN stands for Electronic Communication Network and brokers that use it offer uninterrupted communication between traders and liquidity providers. And when they connect one side to another, they don’t interfere in their negotiations and agreements.
ECN brokers act as some sort of hub for various liquidity providers, be it major commercial banks, funds, or others. Those various providers come together in a single platform where all their price quotes (offerings) are represented and offered to traders.

Advantages of ECN trading

There are various advantages associated with ECN trading and direct connection with liquidity providers. Here are some of them:
  • Higher bid and lower ask prices
  • Tighter spreads
  • Direct trading and better liquidity
  • Immediate trade executions
  • Brokers cannot trade against their clients
Let’s take a look at each of those benefits briefly.

ECN markets offer tighter bid-ask spreads

As we mentioned earlier, ECN brokers act as hubs for various market players operating in Forex. Those players can be commercial banks, hedge (investment) funds, or others. This also means that ECN brokers aggregate all the bid and ask price quotes from those players.
And since there are many players in one place, it is inevitable that there will be both higher and lower bid/ask prices quoted in this “hub”. On the one hand, there will be liquidity providers who have lower bid prices and higher ask prices, resulting in larger spreads.
ECN markets
But on the other hand, there definitely be those who have higher bid and lower ask prices, which results in tighter spreads. What’s more, traders can buy currency pairs from one liquidity provider at a lower price and sell them to another for a higher price. That is the convenience that ECN networks offer.

Direct market executions

Another very important and beneficial aspect with ECN brokers is that they don’t interfere with the relations between traders and market players. This means that unlike STP brokers, who record traders’ positions and negotiate them to liquidity providers themselves, ECN traders can negotiate their trades directly to the market players in the most suitable conditions.
This means that when a trader opens a position for, say, EUR/USD pair for one lot, they won’t need to wait until their broker takes that position to the liquidity provider and negotiate it with them. Instead of that, they can do that themselves and negotiate with the most suitable EUR/USD provider represented on the platform.
For this reason, assets are also very liquid because there are no middlemen between the trading partners. What this means is that currency pairs can be bought or sold without too much delay, right between a trader and its partnering liquidity provider.

ECN account vs standard - trading against clients

This next factor is associated with trading against the clients’ positions. There are many cases where STP brokers open exactly the opposite positions of those placed by their clients. For instance, when a trader opens a long (buy) EUR/USD position, and when a broker delivers that position to the liquidity provider, it will also open a position which will be exactly the opposite - short EUR/USD for the same size.
Many STP brokers trade against their clients because they can get larger payouts from this practice. For instance, if a trader loses from the above-mentioned trade, a broker will gain a payout, but if a trade is successful, the broker will lose its funds.
But as we have already mentioned, ECN networks are not created to transmit traders’ positions to the liquidity providers. Instead, traders do that themselves. And for that reason, brokers cannot go against their clients’ positions.

Disadvantages of ECN markets

Trading Forex with ECN brokers is beneficial for the reasons we have listed above. But it doesn’t mean that they have no downsides. For high service prices, commissions, and other aspects, many traders will decide not to choose ECN brokers. So, here are those disadvantages explained briefly:
  • High deposit requirements: since ECN brokers offer direct communications between traders and liquidity providers, they have high service prices as well. That’s why they usually demand larger initial deposits to open the account;
  • No micro-lots: this one is connected with high service costs and requirements from liquidity providers. Those market players that are represented in this platform often have a minimum position size of 0.1 lot (10,000 currency units). Therefore, traders cannot open positions for 0.01 lot (1,000 currency units);
ECN account vs standard 
  • Fixed commissions: since ECN brokers tend not to take spreads for service payment, they have fixed commissions and fees for each transaction. And usually, those commissions are considerably large, proving once more that while FX ECN market share is not that large, expenses are still quite high.
 There are, of course, other disadvantages with ECN brokers. For instance, the platform is really complicated to use and traders have a hard time understanding all the terms and tools needed for this type of trading.
Therefore, it’s all about deciding whether the services offered by ECN brokers are worth high expenses. For instance, if you want to open large positions and have tighter spreads, then the Electronic Communication Network might be a better option for you. But if your budget is somewhat modest and cannot open large positions, then STP brokers may offer better conditions for your needs.

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What is an ECN broker? - Key takeaways

There are two types of brokers on the Forex market: those who are middlemen between the traders and liquidity providers, and those who connect the two parties directly. The first type is called an STP broker, while the second one is called an ECN broker.
The ECN - Electronic Communication Network - broker is basically a common ground for traders and liquidity providers. On the one hand, liquidity providers quote their bid and ask prices for the assets and allow the ECN brokers to deliver those prices to the traders. On the other hand, traders choose the best prices for their preferences and via ECN broker’s platform, directly negotiate with the providers.
One of the biggest advantages of ECN brokers is that they combine lots of price quotes from different liquidity providers and then, traders can choose the best bid and ask prices for the specific currency pairs. This, in turn, reduces spreads and lost payouts from individual trades.
However, among the many advantages, there are also some disadvantages to ECN brokers. For instance, many of those brokers require large initial deposits for opening a trading account on their platform. Besides, they have fixed commissions which tend to be quite large. Therefore, traders need to consider these conditions before choosing ECN accounts.

FAQ on ECN Forex brokers

What are the advantages of ECN brokers over STP brokers?

As we have already discussed in the guide to what is ECN trading, there are two types of brokers in Forex: STP and ECN brokers. STPs are the middlemen between traders and liquidity providers, while ECNs connect them directly without getting in their way.

One of the main advantages of the ECN broker over the STP broker is that there are many price quotes from different liquidity providers. Traders can easily choose the highest bid and lowest ask prices, effectively minimizing the spreads and lost payouts. 

Another advantage is that trades happen almost instantly - right after the position is open and an ECN trade placed. Not only that, but brokers also cannot trade against their clients, whereas STP brokers can actually benefit from their clients’ losses. These and other advantages make ECN FX brokers quite attractive to many traders.

Does an ECN Forex broker offer micro-lots?

While ECN Forex brokers offer some of the most convenient trading conditions like instant confirmation, smaller bid-ask spreads, and direct connection to the liquidity providers, they have their own share of disadvantages as well.

One of the biggest disadvantages is that traders are required to make larger initial deposits. This means that the service is very costly and not many people would want to use it right after they start trading.

Another disadvantage that comes with the larger financial requirements is the fact that you can't open micro-lot trades with an ECN broker meaning you're locked to either mini or standard lot, which is a much larger sum. As you may remember, micro-lot is worth 1,000 currency units and is considered the smallest position size in trading. And since Forex ECN accounts are expensive, micro-lots aren’t offered under this service.

Why are spreads lower for ECN accounts?

As noted in the guide to what is ECN, one of the biggest advantages of ECN brokers is the fact that they aggregate (combine) lots of liquidity providers and their price quotes. This means that there are all kinds of bid and ask offerings for the traders.

And while there may be expensive liquidity providers who have lower bid prices and higher ask prices, there will definitely be those that offer much more suitable conditions - higher bid and lower ask prices. And since all those price quotes are aggregated by a single ECN Forex broker, traders can choose the offers that suit their interests most.

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