How Does Forex Trading Through an ECN Work?

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Contributor, Benzinga
July 24, 2023

The forex market is decentralized, as all trades are placed and processed online. Several forex brokers use automated electronic communications networks (ECNs) for trading, as they directly match buy orders with sell orders and execute trades instantaneously.

Brokers using ECNs display the best available bid (buy) and ask (sell) prices on the trading platform, allowing investors to make an informed decision. Also, ECN brokers charge relatively lower commissions compared to traditional brokers for matching buy and sell orders and executing trades.

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What is an ECN Broker?

Several forex brokers use ECNs to process trades placed by clients. ECN brokers match a trade with other market participants in the forex market rather than passing on the orders to market makers. ECN forex brokers use non-dealing desk trading platforms and execute trades through automated straight-through processing.

ECN brokers add liquidity to the forex markets as they aim to reduce the bid-ask spread. This objective is in sharp contrast to the market maker brokerages that fix the bid and ask prices and act as principal agents. ECN brokers automatically add transparency, allowing traders to make an informed trading decision after viewing the best-available currency quotations.

Understanding the Electronic Communications Network

Founded in 1969, ECN is a popular automated trading system used by numerous forex brokerages. ECN matches a buy order with a corresponding sell order, thereby eliminating the need for a third party for executing trades. As a result, trades placed through ECNs have tighter spreads. All orders placed through the system are visible to market participants, making it easier for forex traders to place and execute trades directly within minutes.

ECNs are classified under Alternative Trading Systems per the U.S. Securities and Exchange Commission (SEC), and all ECN brokers are required to register as broker-dealers. However, ECN brokers charge flat or percentage-based commissions on each trade.

How to Choose an ECN Forex Broker

Choosing an ECN forex broker can help you maximize returns on currency trades as they offer variable bid-ask spreads and have low slippage rates. Let’s take a closer look.

What Are the Spreads? Fixed or Variable?

ECN brokers match orders placed for a particular currency pair rather than set the bid or ask rates. They are liquidity providers, as they connect traders across the world around the clock. A currency trader from Australia selling one lot of USD/AUD can match to a South African trader willing to buy the currency lot at the quoted sell price.

All ECN brokers offer variable spreads on forex trades. Market makers operate in a diametrically opposed manner as they typically offer fixed spreads on trades.

Is There a Dealing Desk?

ECN forex brokers are non-dealing desk (NND) brokers because they eliminate middlemen and directly execute trades. The bid-ask spreads offered by NND brokers are typically close to the interbank market rates. Trades placed on the ECN are executed automatically with no manual interventions. This automated system is termed straight-through processing. No dealing desks are involved in ECN trades.

What is Slippage?

Slippage occurs when a forex trade is executed at a different price from the expected execution price. As the over-the-counter currency market is highly volatile, exchange rates often change within a fraction of a second, typically during peak trading hours or ahead of major macroeconomic news releases. This movement can cause the price at which a trade is executed to be different from the rate at which the order was placed.

Slippage can be positive and negative. Positive slippage is favorable for traders as it results in improved profit margins, while negative slippage exacerbates losses. Though slippage cannot be eliminated completely, traders can place limit and stop-loss orders.

Choose an ECN Broker and Begin Your Forex Trading Journey Today

ECN forex brokers are often the best choice for beginner currency traders thanks to their competitive interbank market spreads. However, looking at the pricing transparency level and commissions charged by ECN brokers before signing up with a trading platform is essential.

Frequently Asked Questions


What is ECN account in forex trading?


ECN stands for Electronic Communication Network and is a type of account in forex trading where traders can access the interbank market directly and trade with other participants. Unlike with traditional brokers, ECN accounts provide traders with direct access to the global liquidity pool without having to go through a middleman or dealing desk.


What are the advantages of ECN forex brokers?


This type of trading environment offers a number of advantages over dealing desks which include, lower spreads, faster execution, greater transparency and lower commissions.


Which is better ECN or standard?


One of the main benefits of using an ECN broker is that it offers tighter spreads and higher liquidity than traditional brokers. This means that traders can access the best prices available in the market and take advantage of volatile price movements. ECN brokers offer faster execution speeds and greater transparency as there are no conflicting interests between the broker’s interests and those of its clients.

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