Financial markets including Forex and their infrastructure are in constant dynamic development. Only a small part of Forex traders notice its changes. Those traders are usually actively monitor and study the markets and apply different tools into online trading.
The ECN (Electronic Communication Network.) is a communication network, the main function of which is to build the most automated and direct channel for transmitting trade orders between the client and the liquidity provider. The idea of ECN system is to minimize the intermediate links between financial market participants. Particular attention is paid to ECN system by those Forex traders who have a doubt in the integrity of brokers and intermediaries.
The first independent ECN trading network was established in 1999, and since then it has become a more sophisticated technology. Today, you can execute your trades through ECN network via special trading accounts at a large number of Forex brokers. Opening and useing such an account is very simple. But why many traders today prefer the usual trading accounts? Does ECN trading system has enough advantages?
Forex trading account types
First, let’s discuss what types of market access are available for a Forex trader, that are usually coincide with the account type offered by a broker.
1. Regular trading account – used by the vast majority of Forex traders. There are a lot of debates in Forex community on how exactly the trading orders are processed in regular trading accounts. Some believe that the orders are sent directly to the liquidity providers and are processed along with all positions directly on the market. Others believe that the majority of transactions (especially small amounts) are not transferred outside and stay within the company. For example, the broker has a customer who wants to sell a certain asset, and another customer, who wants to buy the same asset. As you can guess, the broker simply connects their orders together, and safely opens positions for both traders.
2. NDD – the type of a trading account where positions are processed without the intervention of a broker (No Dealing Desk). Globally NDD can be divided into ECN and STP. In the first case the transaction are carried out to the market where there are no intermediaries. In the second transaction are transferred directly to the liquidity provider, which is most often a bank. Depending on the size of STP broker and contracts, there might be one or more liquidity providers.
As you can see, the choice of a trader is very easy. A Forex trader can trade though a regular trading account and hope that the broker does not play against him, leaving the transaction inside their systems. Or get an access to the NDD-technology, and have a better confidence in the transparency of all transactions and their results.
Of course, the choice of an account type depends trading conditions. Regular accounts require smaller starting amount as well as they offer lower spreads and higher leverage. You can find a direct link between the attractiveness of trading conditions and the actual costs that a broker has for offering you this type of an account. If the broker doesn’t carry trades out to the foreign market, it means that it significantly saves money and therefore can offer its customers more favorable conditions to encourage them to use this system. But when the broker is required to transfer the order to the interbank market, then there is a number of commitments and expenditure, which, of course, fall on the shoulders of the trader in the form of commissions or spreads.
Even if the idea of the functioning of the regular trading account is not quite right the NDD trading accounts are in any case the preferred solution.
ECN Trading System
Now let’s discuss how the ECN trading system works and look at the process of opening and processing of trading orders. So, you create an order with the required parameters and made a trade execution. Broker transfers it to the ECN network to which it is connected.
Once your trading order gets into the network, the system automatically finds for you an opposite order with the necessary parameters. This is very similar to the system of regular accounts where your orders remain within the company. As the ECN network is also going to find the most suitable agent to meet your application. In the case of ECN network your order will be executed on the same principle, but with real interbank liquidity. Today only central and major banks, government departments, financial departments of large corporations have direct access to ECN network.
ECN system has an interesting point. ECN netword does not make direct payments between counterparties. The network works like a simple notebook, in which the encrypted data is stored on the incoming orders. As soon as the system finds two agents for mutual transactions, they immediately send orders for the formation of orders for payment. Therefore the buyer and seller make all transactions with each other, without any direct intermediaries.
Still it is worth mentioning that the real ECN services are impossible without banks. As mentioned above, all operations are carried out directly between the market’s participants. Mostly because of the great volume of transactions it still needs additional monitoring.
ECN System ADVANTAGES AND DISADVANTAGES
Advantages of ECN trading accounts:
The time of execution of your trading orders on a standard account can be up to several seconds, which is often notices when you opening a position with a large amount. This may be particularly critical in times of high volatility of the market, when within a second a price can seriously influence on your order. At the same time the processing of of your order through the ECN account is instant and is only limited by the speed of communication channels.
2. No re-quotes.
Since the transactions are processed instantly, then you will not be in a situation where the position can not be opened due to the changed price. This is particularly frustrating when a trader is doing scalping and makes short term transactions. But even if you’re not a scalper, but just trading on the news, you know that every second is precious. At the moment of the news release, the price usually shoots a few dozen points, and instead of opening a trading position you receive a message that the position can not be opened due to the changed price. If you do not want to miss a precious moment, then ECN trading account must be your choice.
In contrast to the regular Forex trading accounts, with ECN trading account your transaction will appear instantly on the market and can affect its condition. Of course you probably will not influence on the Forex market with a couple of thousands of dollars in your account, but the fact is that you really become part of the Forex market.
The fact that ECN trading system includes a large number of major banks and corporations, is making this system more reliable and trustful since it is used by very serious players. You can be sure that you will not lose your money because of the conflict of interest with the broker company.
1. Trading account requirements.
This is something that can just scare many novice traders. For the professional Forex trader who trades with a big capital, this will not be an obstacle, as such amount is sufficient for opening an account. But if the amount of your trading account does not exceeds 300-500 dollars, then, unfortunately, you won’t be able to take advantage of ECN trading system. I want to immediately warn those traders who look for Forex brokers with a small amount requirement for opening a trading account. If a your account type allows you to start trading with less than $100, so the most chances are this is not an ECN trading account but a regular trading account.
This is another factor, which may scare off most of the beginner traders. Experienced traders understand that quality service and opportunities are worth the money. Therefore, US $ 10-20 spread fee for a standard lot is not considered as something critical. At the same time, the presence of commission is an excellent indicator of the integrity of the services provided. If the broker charges you money for the opening and closing positions, you can be sure that he is not interested in your loss. It will be more profitable, if your trading is successful and long-lasting.