Put in plain simple language, this means that an ECN forex broker is a forex brokerage firm that does not interfere with the pricing and order placement and execution process, by providing other participants in the forex market with direct access to liquidity providers the banks that set prices of currencies. In order to understand how this process works, you need to understand the structure of the forex market.
Banks constitute probably the biggest players in the market, with large caches of currencies. When they trade among themselves in very large volumes, the forces of demand and supply create the pricing structure of currencies. The pricing of a currency pair can therefore not be the same with any two liquidity providers. These liquidity providers now buy and sell these currencies at the rates that are displayed in the market, but these transactions require huge amount of liquidity.
A market maker, who typically deals with traders with small capital that is not enough to cover the required liquidity, will fill the liquidity gap by acquiring these positions in large volumes, and fragmenting these into smaller volumes that can be taken up by the small clients.
The pricing in this case is now fixed by the market maker. So when a trader buys a currency, he is buying it from the market maker who is selling, and when the trader sells the currency, he is selling it to the market maker who buys it off him.
Thus market makers act as counterparties to the trade. These transactions are done via the dealing desk. The scenario in a true ECN setting is different. The ECN forex brokers send orders to the liquidity providers directly without interfering with the process. Of course, this means that any such trading clients have to be traders with large amounts of cash to cover the liquidity required to sustain the direct market access environment.
Traders thus get pricing from several providers. The brokers do not act as counterparties to the trades. This is what gives trading with an ECN forex broker the reputation it has acquired in terms of transparency.
The process eliminates all forms of conflict of interest as the broker is no longer the counterparty in the transaction. The ECN forex broker is just a facilitator — creating the environment that brings opposing traders against each other and the liquidity providers.
Simply put, it costs more money to trade with an ECN forex broker. If you are unable to meet these requirements, you may consider using a MT4 bridge software, which combines the executions and order placement process on an ECN forex broker platform and that of the MT4 to create a perfect alloy of strategies.
Traders should be wary of brokers who come posing as ECN forex brokers, but still allowing traders to open accounts with ridiculous minimum deposits. Avoid these charlatans who lure unsuspecting traders with promises of ECN environments, but still use dealing desks in executing trades. It is also possible to have a market maker providing an ECN platform that is distinct from their market making product offering. The comparison table below shows you the various ECN forex brokers that are available in the market.
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