One of the concepts which is not very often addressed but very important to understand is ecn forex.ECN stands for Electronic Communications Network.Ecn forex brokers provide a gateway to multiple liquidity providers feeding their prices via a trading platform to traders around the world. Before digging into the nitty gritty of ecn forex it is important to understand the mechanism of a dealing desk.
You will find a large number of brokers who are market makers and they are essentially the ones who have the possibility to trade against you. What you should understand is that there is conflict of interest and if you lose all the funds in your trading account they will make bigger profits than if you triple your trading capital. And this self interest maximization perspective means that the market maker can manipulate currency prices to steal your money. As their name suggests they are market makers who "make the market" and as such knows precisely where is your stop loss. In this way they can manipulate the market prices and stop you out all the time.In addition these market makers offer high spreads because this is where they can also increase their profits .
On the other side we have ecn forex brokers who offer very low spreads as they have access to a large pool of liquidity providers.Moreover with ecn forex there is no counterparty risk because ecn forex brokers do not trade against you but through its network pass on your order to the best possible match .
So what happens in fact is that you trade in an anonymous trading environment through your ecn forex broker who has access to the largest institutional traders in the world. For example, a small forex trader trading with an ecn broker can have his buy order filled by "Bank 1" but his sell or close order for this trade filled by "Bank 2". The best bid and ask is displayed to the trader. Consider the following example:
Assume there are two banks Bank 1 and Bank 2.
And in this example Bank 1 buys (bid) at 1.3521 but sells (ask) at 1.3523. Bank 2 buys (bid) at 1.3522 and sells (ask) at 1.3524
This is shown as follows:
Bank 1 1.3521 1.3523
Bank 2 1.3522 1.3524
From here the best bid and ask prices for the tightest spread is displayed to the retail forex trader and is as follows:
Client price: 1.3522 1.3523 (1 pip spread)
.
Forex Trader 1 buys at the best ask price from Bank 1 at 1.3523 instead of 1.3524 from Bank 2.
And Forex Trader 2 sells at the best bid price of 1.3522 to Bank 2 instead of 1.3521 to Bank 1.
.
As you can see from the above, prices stream from various liquidity providers to an aggregation engine which then selects the best bid and ask prices from the streamed prices. Put simply the most competitive prices are always posted to the retail trader.Indeed the great thing about ecn forex brokers is that you are allowed to make the market. I hope that you can now see why the best forex traders claim that the future of forex trading is ecn forex.
Author Resource:-
Learn about ecn forex and other key concepts you need to be aware of when choosing forex brokers.These concepts are explained by forex expert Amit Achameesing.
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