Before speaking with so many acronyms, let me tell you that all this is much easier than we imagine. Come on, let’s start. What is an ECN account and how it works are some of the questions that I want to answer throughout this post.
1. What is an ECN account?
An ECN (Electronic Communication Network) account refers to an electronic stock market network whose objective is to avoid intermediaries in Forex market operations, allowing aspects such as:
✓ Low spreads
✓ Best prices
✓ Higher execution speed.
In short, we could say that an ECN account is a kind of bridge, created through the FIX technology (Financial Information Exchange), between market participants, generally with high volumes that have the possibility of positioning themselves between supply and demand quickly. Providers with significant liquidity such as banks or large financial institutions.
2. What are the characteristics of ECN accounts?
Mainly, there are two:
✓ There are no interests between the trading company that decides to use an ECN account and the investors because:
Brokers leave their clients’ trades to the market.
✓ They have profits obtained through spreads and commissions paid by operators.
3. Composition of the Forex market
We are going to review to understand how the currency market is formed. Why the foreign exchange market or Forex? Because it is where these types of accounts usually have a place.
- The interbank market.
- Bank entities and customers.
- Retail Forex Market.
4. What are ECN account brokers?
A broker with an ECN account is one that communicates the operations of its clients with several banks and creates a network where other brokers and traders can interact with each other and, therefore, trade.
Without messing it up too much, ECN brokers act as intermediaries between buyers and sellers in the foreign exchange market and do not have trading desks, so it is understood that when we enter an operation in an ECN broker, it becomes part of the market. directly.
4. Advantages and disadvantages of these accounts
✓ Depth and transparency in the market.
✓ Avoid restrictions against some strategies such as scalping.
✓ Pure and hard anonymity.
✓ Speed of execution. This technology is much faster than any other technology like STP.
✓ Client-Bank Trading.
Now, the cons:
✓ Payment of commissions for operations
✓ There is the cost of a number of spreads plus commissions.
✓ Something very important to keep in mind is that to operate with ECN it is convenient to have a higher initial capital, as required by brokers (more quality).
5. Best ECN Brokers
There are 3 fundamental aspects to differentiate one broker from another:
- Prestige of the same
- Financial products that offer
- Liquidity available in purchase and sale operations
- Customer Support
Some of the most reputable brokers with these types of accounts are Pepperstone, Oanda or Darwinex.
So applying it in this case, think that knowing what an ECN broker is allows you to study whether or not to use this tool within the Forex and CFDs markets.
And never forget that when choosing an ECN broker, you must take into account your capital, trading commissions, platforms used, etc.
6. Differences between an ECN account and a Standard account
Ok Rubén, so if I take into account all the previous parameters that you have told me, but still I am not completely sure… what type of broker do I use?
The answer is that it depends on each one’s situation, but it is convenient that we keep in mind the difference between an ECN account and a Standard account.
7. The ECN Network
An ECN account can help you plain and simple because it offers you liquidity through a network.
What does this mean?
It’s simple. An ECN account offers several options and offers available for trading, which means that the spread between ask and bid can be quite tight.
In general, there is some type of commission involved, but of course, it can be something relative.
Pay attention to commissions, without a doubt, because they can be your value proposition at any given time or your Achilles heel.
Another thing to keep in mind is that liquidity can dry up from time to time.
However, as a general rule, the network will keep the spreads relatively tight most of the time, especially if it is a larger network since there are more traders involved in this case.
8. The Standard account
As a general rule, a standard account is generally considered to be one with a fixed spread.
In short, in this type of account, the broker is the counterparty to any position you take. Bad business.
9. Miscellaneous conclusions
Brokers with pure ECN accounts are very rare and most are only available to the more institutional market. What most of them do is give compensation to the client, except if they see that you are profitable. If you are profitable, they will act as real intermediaries because it is not profitable for them to lose money by positioning themselves against you.
What should be clearer from all this is that in the current Forex market, the most important thing when choosing a broker is that it has a good reputation and prestige, as I have repeatedly commented throughout the post. But obviously the following is also very important: knowing what you are doing.
If we do not know how to trade, the type of broker we choose does not matter. As always, thanks for coming this far.
We will read each other in the next one.