The world of forex is dominated by jargon. With everything from currencies to broker formats having their own acronym, trying to navigate the forex world can be a bit of a minefield. Here, however, we’ve broken down one of the key acronyms: ECN.
There’s always a huge debate about who’s the best broker to use and why some types of broker are better than others. Many people swear by using ECN brokers, but why? Here, we try to find out:
What is an ECN?
Foreign exchange brokers come in a variety of shapes, sizes and forms. Due to the fact that the foreign exchange market is unregulated, there’s no set format for brokers, and many deviate from the norm.
ECN brokers are a great example of this. Instead of being a standard broker, they are an automated system that buys and sells orders, connecting major brokerages and individuals who can trade without the need for a middleman.
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How do ECNs Work?
Instead of earning money from the spread, ECN brokers will make money by charging a small fee for every transaction they broker. In taking out the middleman, ECNs make it possible for investors from all over the world, in a variety of locations, to trade with relative ease and speed. To monitor the market, each ECN broker must register as a broker-dealer with the Securities and Exchange Commission.
What’s Good About ECNs?
An ECN will show you the very best bid and ask quotes available, scouring the market and multiple participants automatically and instantly matching and executing orders on your behalf. As well as being used at major exchanges during market hours, they are also widely used out of hours on the forex market by those with an online trading account.
Of course, as you’d expect, there are different ECN accounts for different needs. As a result, there are subtle differences between each account type and you need to ensure that, if you do opt to go down the ECN route, you’re sure that your account suits your specific needs.
The Negatives of Using ECNs
Of course, there are many reasons why traders love ECNs (with many of these listed above), but only mentioning these would be telling half of the story, and there are some very valid reasons why some traders do not use ECNs.
For starters, many ECNs fail to offer integrated chartings and news feeds, meaning that quite a few do not cover all the aspects that a trader needs in their day to day lives. Of course, there are some accounts that do offer this service, but these are often premium accounts and come at an additional cost.
Likewise, because they’re not always user friendly (because many are designed for use by large institutions rather than individuals), it can sometimes be hard to properly calculate stop-loss and break even points in advance of your trades, making the whole thing a bit of a logistical nightmare. It’s also worth pointing out that, because of the small charge on each transaction, if you’re a regular trader, this could mount up to a substantial fee.
Whether you decide to use one or not, knowing the ins and outs of ECNs will hopefully made you a little bit wiser.