How Does Forex Trading Through ECN Work?
Detroit, MI
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March 08, 2023 05:00 AM Eastern Standard Time
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.
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.
Choosing an ECN 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.
Contract-for-difference (CFD) trading platform LonghornFX levies low commissions and swap fees on all trades, making it a hit among new forex traders. The platform won the Best Newcomer Broker and Best New Forex Broker awards in 2020. Click here to open your LonghornFX live trading account today.
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.
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