Did you know that the currency exchange is the largest financial market? Every single day, close to US$6 trillion circulates between individuals and institutions. Today, Forex is open to everyone. All you need is specially designed software, knowledge of your instruments, and decent brokerage. Some of these companies are classified as ECNs. Are they better than all the rest?
The foreign exchange is an over-the-counter system. This means that buyers and sellers connect directly through the Internet. Brokerage firms act as go-betweens for the parties. They may have different sources of revenue. Traders based in India are advised to choose ECN brokers. Here is why.
Basic Distinction
ECNs charge a fixed commission per trade. They compete with market makers, who incorporate profit in their quotes. By definition, the second model is not inferior — it is just different. Here is a closer look at both systems.
Market Makers vs ECN
Market makers are also known as ‘dealing desk brokers’. ECNs are their antitheses, so they are also ‘no dealing desk brokers’. The presence of a desk allows companies to fill orders at their discretion. Trades executed through a market maker are held inside their system. ECNs immediately pass them to other liquidity providers.
Truly automatic execution is only possible through electronic communication networks. Market makers are providers of liquidity. They act as a counterparty for every transaction. When clients sell, they buy from them. This puts clients and brokers in direct opposition. On paper, their profit is derived from spreads.
The spread is the difference between the ask and bid prices for the same instrument. The bigger this gap is — the better for the broker. Market makers determine their pricing, so spreads are fixed.
Slippage: Positive or Negative?
What happens if the system cannot find a match for your position? The trade is executed at a different price. Slippage is normally observed in unstable markets. Limit orders help traders to limit it.
If you work through a market maker, this phenomenon will only work against you. In case of an ECN, it may also be positive. For example, in a volatile market, the buying price may unexpectedly nosedive, and the selling price may jump.
Choice of Accounts
You may open an account with either type of broker. Some companies combine both systems, so you can choose between commissions and floating spreads. For example, the ForexTime brand has a wide range of options with affordable entry. Clients enjoy tight spreads, efficient support, and state-of-the-art technical solutions. Have a look at these FXTM ECN trading conditions.
Choose only regulated brokers authorized by reputable organizations. Look for abbreviations like the FCA, the FCSA, CySEC, etc. These entities license operators and monitor their activities. Trading with an unregulated broker is not only illegal. It is also dangerous, as scams are quite common.
Major Benefits of ECNs
This broker will not bet against you. It has no power over live quotes, as these come from the market. Such companies do not need their clients to lose. Key advantages for traders include:
- no price manipulation;
- access to real-time data;
- instant execution and confirmation of treats;
- tight and flexible spreads that work to your advantage;
- transparency of operations;
- affordability of services;
- fairness.
All market makers include the cost of their services into pricing. Therefore, traders have no way of knowing exactly how much they are charged. In comparison, ECNs provide complete transparency. Of course, not everyone is glad to pay a commission per trade. If trades are frequent, and volume is high, the costs may be substantial.
ECNs broadcast live quotes. The Ask and Bid you see reflect actual market conditions. Spreads are therefore changeable. Currencies are rising and falling all the time, causing them to shrink or widen.
Why ECNs Are Best
If market makers set their own prices, does this mean they manipulate the rates? Sometimes, they do. The model gives them control over the prices traders act on. Their clients do not see real market quotes. This opens the door to abuse and manipulation.
Of course, this does not mean the market makers are evil by definition. You can find trusted regulated brokers that use this system. Besides, fierce competition forces firms to offer reasonable conditions.
Still, brokers with a dealing desk can change prices at their own discretion. Moreover, their interests conflict with their clients’ goals. When you make a profit, it is paid by the broker. The market maker model may be abused.
Electronic communication networks have an obvious advantage. Their model is more transparent by definition. As you get charged per grade, you know exactly what the costs are. These providers do not care if you win or lose.
