Electronic Communication Network (ECN) Explained
Forex is an OTC Market
Forex spot trading is an OTC practice (over-the-counter), and that means the transactions are not cleared in a single exchange, like for example transactions are cleared in the New York Stock Exchange.
The FXMarketSpace Experiment in 2006
In 2006, the Chicago Mercantile Exchange (CME) and Reuters launched the FXMarketSpace (FXMS) which was the world’s 1st centrally cleared forex market. In 2008, they decided to close this innovative platform due to limited attracted liquidity.
The Electronic Communication Network
In general, ECN is an electronic trading platform designed to match long and short trading orders automatically. In the Foreign Exchange Market, ECN works as an electronic bridge linking tier-1 liquidity providers with Retail Traders. The whole process is done via an ECN Forex broker. The liquidity providers of ECN Forex trading consists central banks, retail and investment banks, investment firms, market makers, retail and institutional Forex traders, and etc.
The Role of an ECN
An ECN network is designed to collect, display and execute trading orders automatically without any intervention. Trading on an ECN network provides tight spreads, fast order execution and full anonymity.
Electronic Communication Network Basic Features
These are some key points that differentiate trading via the Electronic Communication Network to other trading practices.
(1) Variable Spreads
Spreads between ask and bid when trading via an Electronic Communication Network are variable and change according to the market volatility. Volatility usually changes during news releases or after important economic and political developments. Only those brokers who act as Market Makers (Dealing-Desk) can offer fixed spreads. The problem with fixed spreads is that they are followed by high re-quotes on at times when the market volatility soars. Therefore, the advantage of fixed spreads is lost. True ECN Forex brokers are offering variable spreads and don’t charge any re-quotes.
(2) Anonymity of Trading
The trading activity of an Electronic Communication Network is totally anonymous. Trading anonymity means that every participant trades on the exact same conditions (neutral prices). In other words, real market conditions for all traders, no matter their trading volumes and their account size. This creates an environment of reliability in favor of retail traders.
(3) Huge Liquidity
As the whole planet trades Forex currencies via the Electronic Communication Network, it is extremely difficult even for huge players such as large investment banks to manipulate the market. Moreover, the huge liquidity ensures the fulfillment of any order, even when market conditions become real tricky. Of course, there is no rule without exemptions, and therefore, once in a couple of years, there might be problems in the fulfillment of trade orders. These problems usually occur after weekends and that is why professional traders do not maintain their positions after the closing of Friday.
ECN Forex Trading FAQ
1. What is ECN Forex Trading?
ECN means Electronic Communication Network and refers to the Electronic Network of Banks. This network is designed to match automatically bid and ask orders and to execute transactions without any intervention. Via the use of the ECN network participants in different geographic locations can easily trade with each other without the need of a middleman.
2.What is an ECN Forex Broker?
ECN Forex Brokers are regulated financial firms that connect traders with the ECN Network via the FIX Protocol (Financial Information Exchange Protocol). ECN brokers create a liquidity bridge between retail traders and the vast market depth of the International Foreign Exchange Marketplace, and they do that without interference.
3. What means Trading on Margin?
Margin means an amount used as collateral for opening any trading position in the Forex market. Trading on margin means opening positions larger than the initial trader’s funds. This feature is called trading leverage. Usually ECN Forex brokers allow trading leverage up to 100:1, and that means trading 1 million dollars with an account of a few thousand dollars. If a broker offers leverage 100:1, by dividing 1 by 100, the min. margin requirement is 1% of the aggregate trading position size.
4. What means Rollover?
Every day at midnight all trading positions are either debited or credited an amount called Rollover or SWAP rate. This amount reflects the differential between the interest rates of two Forex currencies. For example, if you have bought a Forex currency with 5% annual interest rate and at the same time sold a Forex Currency with 1% annual interest rate then your account will gain a daily Rollover rate. Note that this rate is credited every day at midnight except weekends. On Wednesdays the Rollover value becomes triple
- No Rollover on Weekends
- Triple (x3) Rollover on Wednesdays
ECN Forex Trading Guide
ECN trading is the future of Forex Trading as it provides enormous liquidity, speed, and very tight transaction cost.
What means ECN and ECN Forex Trading
ECN means Electronic Communication Network and refers to the Electronic Network of Banks. This network is designed to match automatically bid and ask orders and to execute transactions without intervention. Via the use of the ECN network participants in different geographic locations can easily trade with each other without the need of a middleman.
Connecting Retail Traders with ECN Liquidity Providers
ECN Forex trading is an electronic bridge connecting Tier-1 liquidity providers (banks) and smaller market participants such as retail traders. This connection is realized via an ECN Forex Broker and the use of a Trading Platform such is MetaTrader4.
Read more on ECN Forex Trading FAQ
How ECN Trading Actually Works?
The ECN Forex Brokers connect with the ECN Network via the FIX Protocol (Financial Information Exchange Protocol). This liquidity bridge is taking advantage of the vast market depth of the International Banking Industry. The ECN Forex Broker drives liquidity from tier-1 and delivers it to its clients without interference.
Variable Trading Spreads
Unlike Dealing-Desk brokers, ECN Forex brokers offer variable spreads to their clients. This is happening as ECN Forex Brokers do not control the bid/offer prices, and thus, they can offer only variable spreads and not fixed spreads. Any broker model offering fixed spreads is by rule the front end of a Dealing Desk system.
Types of ECN Forex Brokers
As in the case of other brokerage types, there are two main ECN Broker types: retail ECN brokers and institutional ECN brokers.