Comparing ECN Forex Brokers and Other types of brokers

You will find the terms STP (straight-through processing), and NDD (No-dealing-desk) used in some instances to refer to ECN brokers. While the two terms apply to unique aspects of the ECN, there are significant differences between them. Below is a quick highlight of the different types of Forex brokers in the industry.

1. DD brokers

2. NDD brokers

3. STP brokers

4. ECN brokers (current list)

DD brokers

Dealing desk brokers are also known as market makers because they create the market. They always stick to the complementing side of a trade by buying from traders who are selling and selling to traders who wish to purchase. The trader cannot see the market prices. Hence these brokers can manipulate the costs to meet their interests.

NDD brokers

These brokers allow traders to directly access interbank markets by eliminating the dealing desk. The benefits of such platforms are that they do not restrict trading during trading news times, and eliminate repeated quotes, and additional pausing in the order confirmation process. The broker can make money by widening the spread or charging a commission. STP and ECN+STP brokers both fall in this category.

STP brokers

Traders on an STP platform can access market quotes as well as close trades without the intervention of a dealer. The brokers in this platform directly forward orders to their liquidity provider, which can be banks or traders. Having several such providers increases the overall liquidity of the system. It leads to faster execution of trade orders. However, it is common to find a broker that has only one liquidity provider.

ECN brokers

They operate in an NDD environment. All participants, traders, and banks, can interact on the platform. They create competitive bids amongst themselves and settle for the most suitable deals available at the given time.

An ECN Forex broker is not a counterparty to the transaction. The broker merely facilitates the process by bringing opposing traders together. Such a structure eliminates the chances of conflicts of interest for which DD Forex broker platforms are known.

The main difference between an ECN and STP is that a real ECN has a Depth of Market functionality. The DOM gives the players a view of the available orders and their costs. They can then execute the trades that they find to be most competitive.

Unique Features of ECN Forex Broker Environments

Here are the five unique features of the ECN environment that are worth knowing before trying it out.

1. Who fits in

ECN brokers are only for big players who have the capital to invest. It comes out in most of its requirements such as limitation on deposits and trade sizes. It is, therefore, most suitable for seasonal Forex traders. 

1. Minimum deposit

The standard account size in the Forex world is a micro lot (0.01 of a slot). ECN Forex brokers, however, require higher deposit amounts with some insisting on one mini lot (10 micro lots). 

1. Minimum trade size

ECN might not be the best place for people who prefer trading in micro-lots. Most of them have one mini lot as the minimum trading size. Fortunately, there is a growing number of ECN brokers that allow micro lot sizes. 

1. Maximum trading sizes

Limits on the maximum trade size level are common on market-making platforms. However, since it is a big-players-only environment, ECN brokers allow very high trade sizes. This is because the processing of the orders does not involve a dealing desk. 

1. Spreads

Spreads on ECN platforms are always changing. They can vary widely and sometimes surpasses what most market makers are accepting at the time. The variation of the spreads is affected purely by the market dynamics of demand and supply. 

1. Diversification

 The primary advantage of DD brokers over ECN Forex brokers is the vast variety of choice instruments they offer. ECN brokers will first prove the stability of the instrument before offering to trade in it. The smallest trade size requirement on non-Forex options by the NDD brokers is also very high. It is, therefore, not a suitable option if you wish to diversify into shares, stocks, and commodities.

1. Execution speeds

 ECN brokers are reputable for their fast transaction execution speed, which sometimes takes seconds. Nevertheless, like all Forex brokers, there are times of low liquidity when no one wants to buy or sell. It usually occurs during trade news releases, when the result goes against the general expectation of most participants. Such cases result in longer delays than they would be with market makers.

ECN Trading Bridging software

The software platform varies from one ECN broker to another. However, there are only three main options to choose from, Meta Trade 4/5, cTrader, and Currenex. It is impossible to leave out the best choice among the three because they have different strengths and weaknesses. Since most ECN brokers use more than one platform, you need to know how to select the best software. Here are hints to go by:

Reliability

cTrader and Currenex Viking are the most reliable software for ECN trading. Meta Trader 4 or 5 were primarily for non-ECN brokers. However, there is an ECN MT4 in the industry, and it is worth trying out.

Availability

MT4 is the most available software with an established open-source and online community. However, this is from a general view of the Forex industry. In truth, ECN MT4 is a late entrant with little online community. cTrader is the outright winner among the three regarding use and availability.

The Depth of Market Functionality

The first Meta Trader software with DOM functionality is the MT5. However, it is still rudimentary. cTrader and Currenex Viking come with a better feature.

Level of experience

cTrader and MetaTrader4 are for the experts. cTrader even has supporting programs for sophisticated trading such as cAlgo and cMirror. Experts use cAlgo for algorithmic trading. Currenex Viking on the hand is an excellent tool for beginners in the ECN environment.

How to Filter Fake ECN Forex Brokers

The popularity of ECN brokers has led to an increasing number of brokers labeling themselves and such or claiming to offer ERCN-type of accounts. It is therefore crucial that you understand how to discern fake from real. Here are a few tips

Check the spreads

Spreads in an ideal ECN broker are dynamic. A broker that has nearly fixed spreads and slow executions is undoubtedly not an ECN broker.

Trading sizes

The first question that bank traders asked during the launch of the pioneer ECN Forex broker was the possibility of banks accepting to process direct micro lots. The truth is that this level of execution is only possible for ten or more full slots. It would take longer to attain this threshold if an ECN Forex broker accepted micro lots or smaller trade sizes.

Any broker that accepts such low minimum sizes has to have a dealing desk for the bucketing of the orders. It, therefore, ceases to be a real ECN broker.

Sometimes, knowing what happens behind the scenes might not be essential. Such is the case when you have the certainty that the brokers are matching the orders directly and the execution speed is acceptable.

The liquidity provider

The liquidity provider ought to be a 1 tier investment bank. Most of the fake ECN brokers have their dealing desks acting as a liquidity providers. Most of them do not reveal their liquidity provider to traders. If you have to push to get this information, then the broker is a market maker with an ECN façade.

How to Select the Most Suitable ECN Forex Broker

There exist over 100 known legitimate ECN Forex brokers in the industry today. The procedure for choosing the best among these is similar to selecting any traditional broker. ECN brokers rarely provide misleading information. This is because their target market is more sophisticated than that of market-making brokers. Consequently, some of the best ECN Forex brokers have poor advertisement services.

The three essential features to consider are:

1. Location

2. Regulations that ensure deposit safety

3. Bonuses and promotions

Location

Selecting brokers based on location should be the first step when filtering out suitable options. You can choose brokers that operate within your country of residence or that use a language you understand. Other factors to consider are restrictions and tax legislation. UK residents, for example, would go for ECN brokers with special spread formats to avoid paying taxes on the earnings. In case you reside in the US, your choices are limited due to the restriction on Forex trading.

Regulations that ensure deposit safety

A wise investment scheme assures you of the protection of your capital. Such might not be the concern of those who wish to put in only a small capital that they do not mind losing. However, since ECN is for big players, one needs to have assurance of the safety of their deposits.

The first step in narrowing your list is by avoiding all brokers located in countries, especially islands you are learning about for the first time. Instead, focus on the reputable broker options within your desired location.

Some countries such as the UK protect investors’ deposits to regulated brokers. Registering with such government-backed brokers assures you of getting back your deposit in case you get bankrupt or the broker collapses. Such a structure is critical if you intend to make a substantial investment in ECN Forex trading.

Bonuses and promotions

It is important to tread softly when dealing with the enticements that brokers freely dish out to new traders. It is important to read the terms and conditions to decide if it will be economically beneficial to claim the bonus. Most of these incentives will make it impossible for you to withdraw a part of your deposit until you meet a specified trading threshold.

One more factor you would probably want to consider is the trading platform. You can choose cTrader, MT4 ECN, or Currenex Viking depending on your preference and level of expertise.

The Pros and Cons of ECN Brokers

Pros

 Flexibility

 ECN allows investors to trade outside the regular trading hours. The flexibility makes it suitable for those who prefer to trade for long periods or are not available during regular trading hours.

Transparency

A key benefit that sets ECN apart from market-making brokers is its promise of transparency. All the participants in the system have access to information on the available orders and the prices. ECN platforms also provide price history, which makes it easy to analyze the trends in the market. It also eliminates the possibility of price manipulation.

 High liquidity

Most ECN brokers have more than one liquidity provider. It controls the spread from widening to unnecessary levels.

Little or no slippages

Trading on ECN platforms continues unrestricted even during news release time. The continuity minimizes possible slippages that are common in DD broker platforms during such hours.

Cons

Capital requirement

The minimum account deposits for ECN are very high ranging from $10,000 to $50,00

Cost

Trading on ECN costs more than on other traditional Forex platforms. The brokers charge a commission on each trade and inevitable additional fees. The high charges affect your profit and bottom line.

Conclusion

An ECN broker provides faster and more transparent Forex trading for experts and big players. However, it is essential to watch out for unscrupulous brokers that allow opening accounts with incredibly low deposits. Creating a real ECN environment is expensive. Therefore, any broker that asks for a deposit lower than $10,000 should be dealt with cautiously. Additionally, it is worth remembering that this part of the industry is suitable for high rollers and experts.