The financial industry has evolved significantly over the last few decades. In the past, the major exchanges had hundreds of traders executing trades manually day by day. Today, it's all done by computers, which analyse, initiate, and close orders upon traders request.
It's safe to say that we're living in an age of online brokers. An old-style brokerage company is now an outdated concept, which made way for a single trading platform. A trader can use it without having to go anywhere or contact anyone.
With so many different brokers to choose from, it’s essential to find the one who would be most suitable for your trading needs not only in terms of trading conditions but also reliable in terms of execution.
So, today we will examine the term ‘ECN’ and what it means for you as a trader.
What is ECN?
ECN stands for Electronic Communications Network.
Why do you need an ECN broker?
ECN, in the description of a broker, means that they are merely an intermediary in the trading process. ECN brokers have a poll of liquidity providers - composed of different financial institutions, like banks, for example - that provide quotes for all the assets available on a broker's platform.
An ECN broker will provide a trader with real-time quotes, without any requotes.
So how do brokers make money then?
For example, if the spread between the ask and bid for the EUR/USD pair is 0.2 pips, the broker can display it as 0.5 pips and then make 0.3 as profit.
Choosing a wrong broker might cost you all your investments, so it’s important to be careful with your choice. For example, the opposite of an ECN broker is a Market Maker. Those are brokerage firms that buy and sell your lots. These companies are known to trade against the traders because they are the market themselves. These participants make their money by taking a spread between the ask and bid price. Some market makers also make money by trading against their customers. To spot a market maker, you should look at companies that offer fixed spreads, prevent scalping, and those which offer guaranteed stop orders.
While it is vital to check how secure is a broker, it is also the aforementioned trading conditions that might show you whether it’s a reliable one or not.
Here’s a small checklist for you:
A broker should not allow requotes. To simply put it, it’s a change of official quote by a broker to benefit their side. You should always ensure that your broker takes immediate action on your trades. Your broker should also give you a quote of live prices.
They must have a good source of global liquidity of regulated and competitive providers. Using a broker with no such access will be difficult for you mostly because of the slippage factor.
The broker should be cheaper for you. You should go for a broker who charges no commissions and one who offers tighter spreads.
The company should accept the scalping trading strategy. In scalping, a trader can initiate hundreds of trades per day. Many brokers such as market makers don’t allow the scalping trading strategy.
It’s preferred that your broker accepts automated trading. Many brokers prohibit this type of trading where you use algorithms also known as expert advisors to initiate orders. This type of trading is not the best choice, but the possibility should always be there.
Always do your research before choosing your broker. Don’t be afraid to ask questions and chat with support, check out the customer agreement and FAQ sections. Choosing a broker might be an overwhelming task, but once you’ve found your trusted broker, you can work on your business relationship and make a great collaboration out of it!