Why Choose an ECN Broker for Trading?
2020 saw a huge influx of new traders in the financial markets. Part of this was driven by the economic uncertainties brought about by the Covid-19 pandemic. The other reason was the prolonged lockdowns that restricted people to their homes with only the internet for work and play. Forex traders looking for long-term and reliable platforms choose an ECN broker.
Statistics reveal that while existing traders increased their trading activity, a significant number of first-timers, with little knowledge of the financial markets, opened trading accounts. Brokers, while elated, also scrambled to support new traders with educational content, tutorials, robust trading platforms with demo accounts and more.
However, the first step towards a satisfying trading career is choosing the right broker. This is especially true of forex, the market that never sleeps. But before we take a look at how the right broker can make a significant different to the experience of trading, here’s a look at the types of brokers.
Types of Brokers
The type of broker determines how your trades are handled. It influences the quality of services, transaction costs and spreads.
- Dealing Desk: Also known as market makers, DD brokers usually offer fixed spreads, while providing quotes that could be above or below the live market prices at any given time.
- No Dealing Desk: NDD brokers offer direct access to the interbank market. They do not requote prices, while spreads are unfixed. Spreads tend to be lower with NDD brokers than market makers.
- Straight Through Processing: STP brokers directly forward trading orders to liquidity providers, without interfering in the order execution transactions. They usually work with several liquidity providers to offer a better trading experience to their customers.
- Electric Communication Network: ECN brokers are the most transparent, offering and displaying the actual details of order books. They also offer traders direct access to the interbank market. ECN brokers offer the highest levels of transparency.
Experienced traders prefer ECN brokers. Here’s why.
The ECN Broker
ECN brokers are financial companies that consolidate quotes from multiple liquidity providers to offer clients with the tightest spreads. The electronic network helps connect buyers and sellers directly to each other, sending bid and ask prices into the system. Trade orders are then routed directly to liquidity providers. This makes them different from dealing desk brokers, who pass on orders to market makers.
Since ECN brokers match trades between active traders present in the market, they don’t trade against their clients. However, they do charge commissions per trade, which is how they earn. This is why ECN brokers are more invested in positive outcomes for their clients in the long term. So, there is no conflict of interest.
The ECN model provides many benefits for all types of traders. In particular, if you are a long-term trader, the advanced and reliable trading conditions offered by an ECN broker are worth considering.
1. Deep Liquidity to Ensure Best Prices
Brokers source price quotes from tier-1 liquidity providers. This includes large banks and other regulated financial institutions. In doing so, they ensure price competition and, consequently, tight spreads. These spreads, while being variable, can be as low as 0.1 pips. This minimizes traders’ losses on price differences and enhances trading opportunities.
Such conditions work extremely well for traders using scalping strategies, as they can open many positions simultaneously. Expert Advisors (EA) can be run under better conditions, based on carefully planned and back-tested trading strategies. A larger liquidity pool also allows traders to execute large orders at the best prices. This ensure that their moves don’t impact the market price.
2. Live Price Streaming Facilitates Transparency
Price feed transparency is another vital characteristic of ECN brokers. Traders have access to the same price feed in real-time. This helps them trade without worrying about price manipulation. Moreover, with the availability of historical price data and order execution prices of other traders, transparency is enhanced. This is why ECN brokers always vouch for transparency in their commission structure.
In a way, ECN brokers facilitate democratisation of the marketplace, giving every trader equal access to information.
3. Fastest Execution Speed
Availability of the best final bid/ask quotes enables quick execution of trades and immediate confirmations. There is no interference of a dealing desk or problems regarding frequent re-quotes. Faster trade execution minimizes the chances of slippage, which can impact trading costs and overall results.
Ultra-fast execution speed is important for traders who wish to capture high volatility market events, such as the release of the US NFP report or news regarding the Covid-19 vaccines. However, it is important to remember that along with trading opportunities, volatility also carries risk. This is why appropriate risk management is especially important during periods of volatility.
4. Advantage of Variable Spreads
Over time, the spreads that traders need to pay can have a significant impact on their trading accounts. This is why, while choosing a broker, it is important to determine how they price their spreads. A true ECN broker offers variable spreads. Depending on the strategy and style a trader uses, the spreads become important. For instance, if you trade frequently, during peak market hours when liquidity is optimal (the overlap of New York and London sessions in forex), you might benefit more from forex CFD brokers with variable spreads. This is because during exceptionally high volatility, spreads can widen, leading to higher costs.
5. Flexibility in Position Sizes
In the past, one of the reasons why traders avoided ECN brokers, despite so many benefits like no re-quote, absence of slippage and tight spreads, was that the minimum deposit requirements were high. But now, ECN brokers who provide the option to trade micro lots have much lower initial capital requirement for beginners.
Once you decide to trade with an ECN broker, ensure you pick a regulated one. Another thing to consider is that many broker business models could be hybrid, which is a mixture of ECN and STP (Straight through Processing).
By opening a demo account, you will get first-hand experience of trading with the broker, without risking any hard-earned money. This can help you make an informed choice of broker to trade with.
Reference Links
Forex Brokers Reviews, Investopedia, Forexbonuses, Forexlive, Finra.
