Best ECN Forex Brokers
ECN brokers (Electronic Communication Network brokers) are among the fastest emerging brokerages in the Forex world, and there is no question that new ECN brokers are opening their doors regularly. In short, ECN Forex brokers provide a marketplace where traders and market makers can place competing bids against each other, sometimes as part of a hybrid ECN / STP (straight through processing) execution model. This model is sharply differentiated from “market maker” brokers who take the other side of their customers’ trades. Minimum deposits for ECN accounts are often higher than they are with standard Forex accounts, but there are several significant advantages offered by the best ECN brokers, such as the ability for scalping and lower spreads.
With so many attractive options to choose from, choosing between different ECN trading options can be surprisingly difficult. Compounding the decision is the fact that many traditional brokers offer ECN accounts in addition to their standard trading accounts, which widens your pool of options.
To make your decision easier, we have compared critical aspects of some of the top ECN brokers to give you a starting point in your search for the best ECN Forex broker.
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What is a True Electronic Communication Network (ECN)?
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More and more brokers are advertising themselves as ECN brokers, or at least offering ECN-type accounts. There is a lot of controversy around the question of whether many of these brokers are “real” ECN brokers. So, what is a “real” ECN broker, and how can you tell when one is telling the truth?
A true ECN broker is simply defined as a broker that plugs your orders into a network where it is automatically matched to a matching order from another client or liquidity provider. This is the textbook definition to work from. Most brokers claiming to be ECN brokers are probably telling the truth about this at least, although if you see large spreads, spreads that never seem to really vary, or continuously slow execution, they are almost certainly not.
The more sophisticated problem arises when we ask what qualifies as a “liquidity provider”? If it is just another dealing desk, then how can it be a “true” ECN offering? The network is only as good as its source. To be regarded as a real ECN broker, the liquidity provider should really be a tier 1 bank. We must wonder how often this is really the case, and why many brokers that advertise themselves as ECN brokers are so tight-lipped about which liquidity providers they use!
When the first ECN brokers started appearing, bank traders started to ask how orders for mini-lots (0.1 lots), let alone micro-lots (0.01 lots) could possibly be sent straight through to tier 1 banks for processing. Bank traders will tell you that at this level, trade sizes are usually in minimums of ten or so full lots. This suggests that an ECN broker offering smaller minimum trade sizes must inevitably perform a “bucketing” of orders, and that would require a kind of dealing desk to process and allocate the bucketing.
The final question is, does it really matter? If a broker is at least trying to match orders directly, there is not much of a conflict of interest, potential or otherwise. If you benefit from a low cost of trading and relatively fast execution, then why not be happy with what you have got. Just do not be under any illusions as to what is probably going on behind the scenes.
Basics of an ECN Broker
An ECN broker runs a computerized system which matches its customers’ trade orders electronically and automatically. For example, customer A wants to sell 1 lot of EUR/USD at the price of 1.2000. Customer B wants to buy 1 lot of EUR/USD at the same price. An ECN broker will have a system that can match these two orders, where the broker does not take the other side of the trades. The ECN broker makes most of its profit from charging commission on each trade order which is matched.
Understanding the ECN
ECN brokers will observe different price offerings, known as quotes, from the different liquidity providers they use and offer their customer access to the one with the best spread. The spread will depend on the difference between the buying and selling price and it is measured in pips.
Spreads tend to be lower at ECN brokers, but ECN customers need to understand that the true “spread” is really the spread plus commission charged.
As ECN brokers do not “make a market”, when there are high-impact events in the market which trigger high volatility, it can actually be more difficult to trade normally with an ECN than it might be with a market-maker / no dealing desk broker.
Benefits of the Electronic Communications Network
The primary benefit of using a broker with an ECN execution model is that the broker does not profit from their clients’ net losses, unlike most Forex / CFD brokerages who make their own market though a dealing desk. ECN brokers match corresponding orders between their clients and pass the net orders to liquidity providers. This means that there are fewer potential conflicts of interest between an ECN broker and their clients.
Traders using an ECN broker should get honest, automated, anonymous, and fast trade execution.
As ECN fee models usually offer lower spreads in practice although commissions are also charged, ECNs often offer an overall lower cost of trading to clients trading in relatively large quantities.
Where a true, pure ECN execution model exists, customers can even occasionally benefit from inverted spreads, which occurs when for at least a few moments, the bid price is lower than the ask price. In theory, these moments offer an opportunity for risk-free profit if execution is fast enough, but once the commission charged is factored in any net profit would vanish. Inverted spreads do at least offer a relative bargain to the trader.
Disadvantages of the Electronic Communications Network
While the spreads available from an ECN broker are generally low, when commissions are factored in, the smaller trader might find they are paying the same overall cost of trading as they would at a market-maker broker. On top of this, spreads can be very unpredictable in an ECN network, depending on the market behavior of the ECN broker’s clients. When natural liquidity is thin, spreads may be very wide, particularly at the time of major market releases.
Some ECN brokers do not offer trading in micro-lots but impose a minimum trade size of 1 mini-lot. Therefore, again, this might force traders with relatively low trading capital to trade higher position sizes than they would ideally want to, forcing them into an over-leveraged position.
How Does an Electronic Communication Network Work?
Once you place a trade, it will be matched with a buy or sell order from someone else in the world. It will be executed immediately and anonymously, and you will be charged a fixed commission price and probably a relatively low spread.
Traders who have never used an ECN broker will find that the experience of ECN trading can be very different to trading with brokers using the more common market-maker / dealing desk execution model. ECN trading can be less liquid when major events are moving the market. Market-makers tend to widen spreads at these moments, but ECN brokers will often present very large and sudden price jumps in their price feed, even if spreads will tend to remain somewhat lower than those offered by market-maker brokers.
As a general rule, trading liquid markets during periods of peak liquidity is where the practical benefits and economies of ECN trading become most obvious.
Possibly one of the greatest benefits of using an ECN broker is largely intangible: knowing that you have no potential conflict of interest with your broker, because they do not make any additional profit when you make a losing trading.
What to Consider When Choosing the Best ECN Brokers
The best ECN trading account forex broker for you will depend upon where you are resident, how large or small you trade, what you trade, and how frequently you trade, as these will all affect the cost of your trading. Different fee models will be more economical for one type of trader than another. Keep your trading style in mind when you are comparing broker offerings. It is always a good idea to read the small print since a low spread could mean a bigger commission and vice versa.
Choosing an ECN broker is not very different from choosing any broker. There are not many special factors to watch out for at ECN brokers that differ from what should be the usual considerations.
When choosing any Forex broker, you should start from how much money you want to deposit, what kind of instruments you want to trade, how often you want to trade, and where you are located. Beginning with these three factors, you should be able to eliminate several brokers from your list of candidates. The good news is that brokers that do not meet minimum standards of acceptability in one area are usually the same ones that will not meet required standards in other areas also, so it becomes easier to eliminate them.
Starting with location, you might feel more comfortable with a broker located in your own country (or a nearby country), or one in a country that speaks the same language as your or which has a similar legal system. If you are a U.S. resident, you have special issues to consider as the U.S. is quite restrictive in Forex trading and if you must be onshore you have little choice, but it makes your choice easier. If you live in the United Kingdom, you might want a U.K.-based broker that offers spread betting format for tax purposes, so you will probably not have to pay any tax on any winnings. This is probably the easiest place to start and helps you narrow down the list considerably right away when choosing a Forex broker.
The next step to consider is regulation and the safety of your deposit. This might not matter so much to you if you only intend to deposit a relatively small amount of money that is not very important to you. If not, though, this is a very big issue. Some countries have a well-developed culture of financial regulation enforcement, which is always reassuring, and are just not places where the big fraudsters can thrive. Another big issue to consider is whether any protection is offered on your deposit. For example, at the time of writing, the United Kingdom government protects everyone’s deposit with any regulated broker up to a maximum amount of GBP 75,000. This means that if you deposit that amount or less with a broker regulated by and based in the United Kingdom, if they steal from you or cheat you or even just go bankrupt, you should eventually receive your deposit back from the government there. This is a significant advantage and provides a lot of reassurance. If your deposit is a significant sum, you should seriously question whether it is wise to deposit it anywhere that does not offer government-backed deposit protection. You also should be biased towards reputable financial centers and away from tiny islands you never heard of before!
The third factor to think about is the cost of trading. These days, there is no reason why anyone with a significant amount to deposit should put up with a total spread and commission equaling more than 1 pip on the benchmark EUR/USD Forex currency pair. One way to compare spreads is to open demo accounts at each of your candidate brokers to see what their spreads really are. One potential problem with this strategy, however, is that brokers have been known to make conditions in their demo accounts, including spreads, significantly better than those which prevail in their real money accounts. Fortunately, there are a few websites which compare the spreads of real money accounts in real time across a range of different brokers, so looking here is going to be a good idea.
Another serious factor to consider in choosing a broker is your style or intended style of trading i.e. how many trades you usually make. Are you or are you going to be a scalper, day trader, swing trader or position trader? If you are making few trades but leaving your positions open for several days or even over weeks and months, you should consider how competitive are brokers are in terms of their overnight financing rates which are generally charged each day against positions left open at 5pm New York time. For position traders, these rates can make more difference to overall profit and loss than the spreads charged, at least up to a point. However, if you are going to be leaving trades open for only minutes or hours but making many more trades, the spreads become a more influential factor, and overnight financing may not be an issue at all. This means that of two Forex brokers, one might be the most economical choice for you as an intraday trader, but not as a longer-term trader holding positions overnight.
The next thing to consider is the broker’s trading platform. Does it work smoothly, or does it have problems freezing up? It is easy, intuitive, and pleasant to use, or not? Does the execution work in a manner that suggests the Forex broker is a true ECN broker or something close to it?
Finally, you can think about the issues that brokers’ advertising likes to focus on, but which are really the lowest of your concerns. Bonuses and other beneficial promotions could be interesting, but check the small print: accepting a bonus, deposit or otherwise, can mean you will be unable to withdraw a certain amount of your deposit until you have made a minimum number of trades.
One good think about choosing ECN brokers is that they tend to aim at a more sophisticated market than market-making brokers, meaning that you probably will not have to worry about misleading terms or hard sells. The most professional brokers of all sometimes have poor advertising and customer service, but they may be offering you the best ECN brokerage deal possible.
Reputable ECN Brokers Checklist
- Where is the broker regulated? Reputable financial centers with strong regulatory protection for retail traders are best.
- Does the broker have a generally good reputation? Do some internet searches and see what customers say, but do not believe everything you can find without verifying it. Pay most attention as to whether they have been fined or censured by any regulator or legal system.
- Has the broker been in business for a long time? As a general rule, the longer a broker has been in business, the better. Two years in business is a good minimum benchmark.
- Is the broker clear about having the capability to process withdrawals quickly? Anything longer than 3 business days should raise a red flag.
- The broker should offer the kind of customer support that responds efficiently to any serious problem flagged by a client within 24 hours.
- If you are very determined to find “true” ECNs, be aware that this type of broker will sometimes momentarily offer inverted spreads. An inverted spread is one where the bid price can be lower than the ask price for a few moments.
- Check to see the full range of assets offered by the broker, and what the typical spreads, commissions, and overnight fees applicable stand at.
- Check to see that a broker’s required minimum deposit (if any) is not greater than the sum you are willing and able to deposit.
- If you have a favored trading platform you are really set on using to trade, you should check whether a broker offers that platform. Alternatively, you may want to at least check that the platform or platforms offered are acceptable to you.
- If you are looking for an Islamic or Nano account, check that the broker offers such an option.
- Check the available funding methods for the ECN Brokers – do they accept e-payments, debit cards, credit cards or bank wire transfers?
- Does your ECN broker offer local training and seminar presentations?
Why do ECN Brokers Need to be Regulated?
It is important for any broker to be regulated in order to keep your funds safe and protect you against fraud. Reputable brokers are generally multinational and therefore supervised by more than one regulatory body. You will be assigned to the broker’s legal entity most suitable to your country of residence, which means policies may differ between different geographical branches of the same broker.
ECN Brokers with Round-the-Clock Support
If you choose to deposit with an ECN broker, it might be a good idea to make sure they offer around-the-clock support. The reason behind this is because ECN brokers authorize 24/7 orders for crypto CFDs, and the Forex worldwide is open around the clock from Monday in New Zealand until Friday evening in New York. There are even a few Forex brokers offering weekend trading.
Understanding Different Types of Brokers: ECN, STP, ECN+STP
Once you know what your goals as a trader are, it is important to understand the types of brokers and what each of these has to offer. The first thing you should look at is the type of network they offer. These could be ECN, STP or the hybrid model which is ECN+STP.
Types of Brokers
Brokers can be categorized depending on the network they use to function, thus offering different prices, trading hours and execution times. The available systems are ECN, STP and ECN+STP.
A dealing desk is a network operated by certain brokers. When you place an order through a dealing desk, your broker will take the other side of your trade. In other words, the broker employs skilled professionals, or maybe operates an algorithm, to build an inventory of currencies which it passes off to its customers at different prices as required. There will usually be relatively fixed spreads, and they do not depend on an external liquidity pool. Dealing desk brokers are also known as market makers.
This means the market order does not pass through a market maker. Buys and sells go
directly to the liquidity provider. No-dealing desks can either be STP or ECN brokers.
STP stands for Straight Through Processing. It is a no-dealing desk broker. STPs will set prices and market conditions depending on the customer’s trade volume, performance, and account type. They offer relatively small commissions and higher spreads.
An ECN broker will consolidate their prices after comparing costs from several market providers in order to offer the lowest spread. They will earn their profit by charging a fixed commission.
A hybrid model is when both ECN and STP models are fused together in order to create a better deal for both the broker and the client. They can use characteristics from ECN and STP to automate trades, change spreads and commissions, and work with different markets.
ECN vs. Standard Account
If you see a broker offer something called a “standard account”, that broker (or at least, that account) will almost certainly not be an ECN. They will probably be offering an account which operates under a market-making order execution. Make sure you know what you are getting.
What are ECN brokers?
ECN brokers are non-dealing desk brokers offering right spreads, 24/7 trading hours, immediate execution, and fixed commissions.
Which is the best ECN broker?
It will depend on your needs. It is always a good idea to try out a demo account and see if the broker meets what you are looking for. Check the maximum leverage offered, minimum deposit required, range of assets, regulation, and platform types. If they match what you are seeking, that ECN broker deserves a place on your shortlist.
Which is better? ECN or STP?
In practice, there is often little difference between two execution policies where one is labelled “ECN” and other “STP”. To some extent these terms are ill-defined, as one may be used rather than another primarily for marketing purposes. The best approach is likely to be one of looking into and understanding the details of a broker’s actual execution policy rather than the label it gives itself, then comparing between prospective broker candidates.
How do ECN brokers make money?
ECN brokers make money from fixed commissions charged to the customer on each trade.