ECN (Electronic Communication Network) is a technology that automatically links buyers and sellers in the Forex and securities markets. A computerized system matches buy orders with sell orders so that investors can make trades quickly and cheaply.
It is important that ECN always looks for the best requests and asks for quotes and then connects them to complete the exchange. And all this happens without an intermediary.
ECN is considered as an alternative trading system because it does not use market makers from the exchange or OTC market. Orders can be partially or fully executed even after hours, as most orders placed on ECN are limit orders with a predetermined trade price.
How does ECN work?
You need an account to work in this system.
ECN account is a special type of electronic communication account in a system without intermediaries. It is based on modern technology and is suitable for experienced players, which provides trades at the best prices and fast stable execution. However, opening an account is not enough for ECN trading.
Network access provided by a specific broker is also required.
How does the system work:
- banks send price offers to the ECN system server
- brokers drop quotes to traders' trading terminals
- traders evaluate the situation and decide whether it is necessary to make a deal or not
- at the same time they send a request to the intermediary, which is automatically displayed on the server
- as a result of comparison with offers of other ECN brokers and liquidity providers, the order is executed at the best price.
Today, there are customized platforms and the possibility of round-the-clock trading. The network has a huge shared database of client requests and the ability to execute orders automatically without the involvement of third parties.
Advantages and disadvantages of ECN
Advantages:
- Fast order execution - one of the main advantages of using an ECN is that it provides faster execution. Unlike a standard broker who has to pass your position to a liquidity provider, an ECN completely eliminates the presence of an intermediary.
- Better privacy - another advantage of ECNs is that they provide better privacy than other brokers. There is a certain level of anonymity as you can make trades without the presence of a market maker who may receive certain information about your trades. This is perfect for those who want to make large trades without attracting too much attention.
- Tighter spreads - electronic communication networks also offer tighter spreads. After all, the system is organized in such a way that it always chooses the best price for the transaction. The overall fees and commissions of ECN brokers are generally lower when compared to the spreads of traditional brokers. You can even do arbitrage - buy a currency pair at a lower price and then sell it to another liquidity provider at a higher price.
- Access to trading after hours - ECN platforms are also convenient for access to trading after hours. If you want to execute orders outside of standard trading hours to catch changes in news or price movements, you can easily do so. ECNs can be an ideal solution for investors who are unable to work during regular market hours or simply prefer greater flexibility and accessibility.
- You don't compete with the broker - Perhaps the most valuable advantage of ECNs is that investors don't have to compete with the broker. Traditional brokers can take positions against you, which can work in their favor - at your expense. An ECN platform receives a commission regardless of where the investor trades, so there is no conflict of interest or opportunity to bet against you. In other words, this can reduce the risk of price manipulation or other tactics that can reduce an investor's profits.
Disadvantages:
- Access fees - A significant disadvantage of ECN accounts is that you must pay an access fee in addition to commissions. ECN fees depend on the platform, which can make calculating stop loss and breakeven point difficult for some investors.
- Complex platforms - another disadvantage of ECNs is that trading platforms are not always user-friendly. Traditional brokers tend to offer simple systems that are easy to navigate and learn, but many ECNs lack this. They are still more aimed at pro traders. They may also lack some of the standard data and integrated charts that other brokers offer. Because of this, it can be harder for beginners to learn how to trade.