What Is an ECN in Trading?
May 5, 20211.4K views0 comments
MT: Learn about ECN and try it to earn more!
MD: ECN is a great possibility for ordinary traders who want to earn more as it allows you not to pay brokerage fees. Try it now!
What Is an ECN in Trading?
ECN stands for Electronic Communication Network. It is a system created to connect bidders among themselves by excluding all intermediaries from their interactions. It already explains why ECN trading is so popular and why many traders want to use it.
How transactions are made in the ECN system
That is, the system automatically brings together the orders of traders, brokers, and other trading participants and executes them. For example, you placed an order to buy 100 lots of EUR/CHF, then the ECN system looks for a return order from some other participant to sell 100 lots of the same currency pair, and when it finds it, it makes a deal.
The necessary conditions for the transaction are:
- Compliance of financial instruments for which the transaction is planned. If, for example, you placed an order to sell the EUR/JPY currency pair, the system will automatically filter out all other offers apart from counter orders to buy EUR/JPY.
- Matching quotes. By specifying the desired transaction price in your order, you can be sure that the system will look for counter orders only at this price.
- Correspondence of the volumes exhibited by the seller and by the buyer. If you put up for sale, for example, one hundred lots, then the system will look for a buyer for you who wants to buy exactly 100 lots of the financial instrument specified in the order.
What are the main advantages and disadvantages of the system?
The ECN system has many undeniable advantages, including:
- Market globalization. Thanks to the use of ECN, it becomes possible to trade daily and around the clock, while sellers and buyers can be located not only in different geographic locations but also in different time zones.
- Thanks to the use of ECN, there is a significant expansion of the contingent of bidders, each of which offers its own quotes. This has the most positive effect on the already good liquidity of the Forex market.
- Minimum spreads and commissions for transactions.
- There is not even a hint of interest in draining the trader’s deposit (which, unfortunately, is the fault of many Forex brokers and so-called Forex kitchens).
- Trades in ECN are usually executed at a decent speed, there are no requotes, and slippage is minimal.
- All transactions made in the system are as transparent as possible. This means that the names of the counterparties and the volumes of their transactions are freely available to all subscribers of the system.
- All participants are supplied with a full range of information necessary for trading.
There are, of course, some drawbacks. For example, a trader should be prepared for the fact that in addition to the spread, they will also have to pay a commission for providing access to ECN. And besides this, many will consider a floating spread to be a disadvantage.
Overall, if you are tired of common Forex trading and want to try something new, then ECN is a great option for you. At the same time, you should gain relevant knowledge about it to be sure of what you are doing and gain the maximum profit. You can learn everything about trading on the Forextime blog, which is available for users from all over the world, Asia, Europe, South Africa, and so on.
The constantly changing size of the spread is an inherent consequence of ECN trading. This can create certain difficulties when using advisors and trading robots because when testing them on historical data, a fixed spread is used. This kind of disagreement can lead to the fact that a robot trading with a fixed size of the spread will make a profit, and with a floating one, it will bring a loss (this is especially true for arbitrage, scalping, and other systems based on taking profit on the principle of “a little bit, but often”).
ECN for an ordinary trader
Ordinary traders can get access to the ECN system through some brokers registered in this network. Moreover, in this case, the broker will act exclusively in the role of a transmitter and in no way will be able to influence either prices or the speed of order execution. Theoretically, the broker will not be able to drain your deposit artificially.
How does it look in practice? It is impossible to say for all brokers, but it may well be that many are simply hiding behind the new fashionable term ECN while continuing to “pluck” the deposits of gullible traders.
However, there are many signs by which one can judge whether the broker (dealer) really provides you with access to trading via ECN. Among them are such as:
- Ability to work with the Depth of Market. That is, in the trading terminal provided by your broker, firstly, there should be such an option in principle, and secondly, it should not be an empty glass (which can be found in any MT4 or MT5 terminal), but filled with real orders indicating volumes and prices.
- The ability to place your order at any distance from the current market price (without restrictions in the form of a minimum offset) and even within the spread.
- The ability to see exactly who is your counterparty for the deal.
The most famous ECNs
The most famous ECN system is Currenex, in fact, it is the first system to introduce this network to the masses. It was established in 1999 in California and currently has offices in many parts of the world.
Some other systems are:
- Attain ECN;
- Bloomberg Trade Book ECN;
- Instinet ECN;
- Island ECN;
- Nextrade ECN;
- Market XT ECN;
- NYSE ECN.
Large treasuries, central banks, public organizations, corporate finance managers, etc. can become members of this system, passed a special registration process. So, do some research before choosing a platform for yourself.