Ecn forex is a key concept in retail forex trading but many small traders are not aware of its importance .ECN stands for Electronic Communications Network.Ecn forex brokers provide a gateway to multiple liquidity providers feeding their prices via a trading platform to traders around the world. However before explaining ecn forex it is essential to give a brief overview on the operations of a dealing desk.
On the internet you have a wide variety of brokers and the ones we are interested with are called forex market makers. They are the ones who act as counterparty when you make a trade. This means that if you make it big and win a few thousand dollars they are the ones who will lose the most . And this self interest maximization perspective means that the market maker can manipulate currency prices to steal your money. As their name suggests they are market makers who "make the market" and as such knows precisely where is your stop loss. In this way they can manipulate the market prices and stop you out all the time.In addition these market makers offer high spreads because this is where they can also increase their profits .
On the other hand an ECN broker allows you to enter a bid inside or outside the spread allowing for tighter spreads and more liquidity.Moreover with ecn forex there is no counterparty risk because ecn forex brokers do not trade against you but through its network pass on your order to the best possible match .
Therefore put differently the trades are done by your ecn forex broker who has direct contact with other retail and institutional traders. A client trader might have their buy order filled by liquidity provider "Bank 1", and close the same order against liquidity provider "Bank 2". As it happens, the best bid and ask is always displayed to the trader. Let us take a look at an example:
Assume there are two banks Bank 1 and Bank 2.
And in this example Bank 1 buys (bid) at 1.3521 but sells (ask) at 1.3523. Bank 2 buys (bid) at 1.3522 and sells (ask) at 1.3524.
This is shown as follows:
Bank 1 1.3521 1.3523
Bank 2 1.3522 1.3524
From here the best bid and ask prices for the tightest spread is displayed to the retail forex trader and is as follows:
Client price: 1.3522 1.3523 (1 pip spread)
Forex Trader 1 buys at the best ask price from Bank 1 at 1.3523 instead of 1.3524 from Bank 2.
And Forex Trader 2 sells at the best bid price of 1.3522 to Bank 2 instead of 1.3521 to Bank 1.
From the above table, you can get an idea of the process. Prices are streamed from multiple liquidity providers to an aggregation engine which then chooses the best buy and sell from the streamed prices. Put simply the most competitive prices are always posted to the retail trader.Indeed the great thing about ecn forex brokers is that you are allowed to make the market. I hope that you can now see why the best forex traders claim that the future of forex trading is ecn forex.
Learn about ecn forex and other key concepts you need to be aware of when choosing forex brokers.These concepts are explained by forex expert Amit Achameesing.