An ECN broker offers traders direct access to the Forex market using a network of liquidity providers to play counterparty to their clients’ trades. ECN brokers often have numerous liquidity providers, meaning that extremely competitive pricing can be found.
As all trades that are put through an ECN broker are posted directly to market, spreads are generally very tight – often down to 0 pips at times of high volatility. For this reason, ECN brokers will also charge a commission, this is their fee for playing matchmaker and finding a counterparty to your trade.
One common issue with ECN brokers is slippage and requotes. Because ECN brokers rely on external liquidity to match your trade, trades are not always posted instantly. This is usually an issue at times of high volatility, usually after a large event or data release. This also means that the market can move past your stop-loss orders, and your losses can far exceed what you expect.
The last thing to be aware of with ECN brokers is that they generally require a larger minimum deposit.
ECN Brokers vs Market Maker Brokers
In contrast to ECN brokers, a market maker Forex broker always plays counterparty to your trade and always acts as the market with all clients – hence the name. Market makers are also known as dealing desk brokers, as all trades will be filled at the rates set by the broker’s internal dealing desk. This business model, which means a market maker will always profit from their clients’ losses, generates an inherent conflict of interest which many traders are cautious of.
Currently, most well-regulated market makers are well regarded in the industry, despite the conflict of interest, and they go to great lengths to ensure their clients are not being unfairly treated.
But, regardless, a market maker broker is not a desirable choice for an experienced Forex trader. Even if they are honest, you will be limited to trading with one counterparty who is always trading against you and never on the open market with dynamic spreads.
That said, if you do want instant execution of your trades and you don’t want to pay a commission, a trusted market maker is not a terrible idea.
ECN Broker or ECN/STP Broker?
Another acronym you will often see in combination with ECN is STP (as in ECN/STP). STP is the method of the transaction – with STP your order is sent directly to the counterparty through the Financial Information Exchange (FIX) protocol. The FIX protocol decreases trade execution time, reduces slippage and ensures that traders get the best available pricing.
The STP protocol can be used by market-maker brokers as well as ECN brokers, and some brokers use a hybrid formula, where they will sometimes be the counterparty, and other times use an external liquidity provider. While this does lead to less slippage, it does return us back to the problem of conflict of interest.
In most cases choosing a hybrid broker is the best way to go, as they will give you the most options.
Should I trade with an ECN Broker?
ECN brokers do not have the conflict of interest you find at market makers and spreads are much tighter, but there are slippage-related trading risks and you will always pay commission on your trades. There is also the matter of the higher minimum deposit.
Are ECN brokers better than market maker? I don’t think that’s correct. All the brokers we work with are trusted and well-regulated and I believe the answer to this question is always down to personal preference. My own belief is that ECN brokers are better for more experienced traders, who are confident enough in their own skills to risk more capital and are happy to pay commission, and market maker brokers are better for beginners who don’t want to risk too much when they are still learning.
