It is an automated form of trading, where traders are directly connected to the top-tier liquidity providers like banks, brokerages, and other traders across the world. The role of the traditional middleman is absent here. Due to the transparency and ease that it provides, ECN has been adopted by a vast number of traders across the world.

How does ECN forex trading work?

ECN trading works on the Financial Information Exchange protocol (FIX). It is an international electronic communications protocol that facilitates real-time exchange of information between market participants. It is widely used, both by institutions and individual traders. The protocol manages delivery of trading applications, keeping latency as low as possible for faster trade executions.

The automated system matches purchase and sell orders for currencies. Traders get the best accessible bid and ask quotes from a particular group of market participants. Since the system consolidates price quotes from various market participants, clients are offered much tighter bid/ask spreads than what would have been normally available to them. 

The system automatically matches orders and executes them instantly. Individual traders are connected to the best liquidity providers without the need for a middleman, both in exchange markets and over-the-counter markets. In case, a specific order information is unavailable, the system provides prices that reflect the lowest ask and highest bid listed on the open market.

ECN orders are mostly limit orders. The system allows passive order matching. ECNs can be customised to suit the needs of both institutional and retail investors.

Who is an ECN broker?

An ECN broker matches trades between market participants, delivering client orders to liquidity providers. Such brokers cannot trade against the client and they offer spreads much narrower than other types of brokers. Hence, they charge a fixed and transparent commission for every transaction made. They majorly deal with interbank and large financial institutions, which means greater trade allotment and higher margins.

ECN trading is anonymous, which allows traders to deal with neutral prices, based on authentic market conditions, rather than any bias. ECN brokers also allow clients immediate trade execution. Clients can trade currencies on live streamed prices and give immediate confirmation. 

Robust ECN trading software like cTrader, provided by OctaFX, provides excellent access to market data. Traders can use this market data feed to make quick trades, with all necessary risk management systems in place. The platform has professional and unique charting features and technical analysis tools, apart from fast trade execution capacity. It is accessible through a web browser, which makes it easy for traders to access their accounts from anywhere in the world. In addition to all this, the platform also has an appealing visual interface.

However, the platform you choose should be suited to your trading attitude and needs. It is always wise to check out the demo versions of platforms, before using them in live markets.

Advantages of ECN Forex Trading

The absence of an NDD (No Dealing Desk) ensures that there are no re-quotes. There is no interference from price makers either. Since an ECN broker directly connects traders to market participants, there is greater transparency in pricing too. 

Due to the presence of a large number of market participants, traders can gain access to the best bid and ask quotes. What’s more, ECN trading can facilitate the lowest spreads even during times of higher market volatility. An added advantage of this is for the scalpers who thrive in high volatility conditions. Traders can gain access to a global liquidity pool of regulated, qualified and competitive financial institutions.

ECN trading can take place on major exchanges during market hours, as well as after-hours trading, which is a vital aspect of the forex markets. Traders have complete anonymity, so the neutral prices are not slanted against their trade direction, based on market positions or tactics.

Choosing the best ECN broker

When considering an ECN broker, always keep some key things in mind, such as:

  • A true ECN broker provides floating and variable spreads.

  • There shouldn’t be any mention of a dealing desk on the broker’s website.

  • Consider the aspect of negative slippage. There shouldn’t be any.

  • See the aspects of liquidity and trade execution. Order execution has to be seamless and at a fair price.

  • Fixed or zero commission fees

  • Trading platform that suits your needs.

 

It is a smart choice to compare these points across various prospects. In order to see if their claims are true, check their ECN forex demo account. In the end, study various aspects of the style itself and decide if it suits your temperament and trading style.