The Forex market or the Foreign Exchange market is the single largest liquid market in the world. Forex traders enter the market to capitalize on the fluctuating values of different currencies. They do this by purchasing them when prices drop, then selling them when they peak to turn a profit. Unlike the share market, the forex market is not regulated by any exchange. Instead, the trading occurs directly between the seller and the client through a broker that operates over a network called the Electronic Communication Network.
The Electronic Communication Network (ECN) is widely regarded as the future of Forex markets around the world. This is something that Forex traders, both novice and veteran, should be familiar and comfortable with. Here’s everything you need to know about ECN and how to use it.
An Electronic Communication Network, also known as an Alternative Trading System, is a computerized system that enables individual traders to connect with full-scale brokerages and trade stocks, and currencies. All directly without the need of any regulating medium like a stock exchange. This allows people from various locations around the world to trade amongst each other without any restrictions. It essentially matches buyers and sellers and allows instantaneous transactions irrespective of the time or locations of the participants. Trading over Electronic Communication Networks occurs through brokers. The Brokers are essentially financial experts that help consolidate the information regarding the market and help link clients to prospective sellers. They connect the forex trader directly with their liquidity providers
Trading over the Electronic Communication Network offers significant advantages. Here are some ways in which using ECN can be beneficial to you.
Trading over the Electronic Communication Network offers complete anonymity. This is because while trading through the Electronic Communication Network, the participants do not interact with each other. Instead, they interact through a broker which serves as a bridge between them. This makes sure that the participants remain completely anonymous. Unlike in a Market Maker, where the participant interacts directly with the broker or the bank.
Although while trading over the Electronic Communication Network trading is through a broker, the transaction is immediate and instantaneous. The moment the deal is finalized, it is confirmed as well. So once they accept the final bid, there cannot be any re-quotes. The instantaneous nature of the translation ensures that there is no change in the price of the asset that you are investing in. Thereby, preventing your order from being rejected.
The broker that you use to trade over the Electronic Communication Network does not trade against you. They only serve as an intermediary between your buying and selling orders. Further, the design of the system ensures that it earns money irrespective of whether you make or lose money. As a consequence, the broker does not have any conflict of interest, which works in your favor.
A Market Maker can direct the flow of the market by setting the prices. However, a broker simply acts as an intermediary and does not set the prices. Consequently, the broker cannot manipulate the prices. The broker displays prices from various official sources in real-time and offers you raw market spreads.
ECN Brokers also allow you to perform trading after the market closes. This offers the opportunity to properly respond to price fluctuations and take into account aftermarket news and analysis.
While trading through Electronic Communication Networks, traders are assured of complete access to market prices through a broker. Brokers provide variable spreads and as there is continuous variation in the prices of different currencies, forex traders have the option of buying/selling when the prices are right and profitable for them. Here, the broker does not control the prices. But, traders have access to real-time prices. These of course depend on stability, demand, supply, and other market parameters.
Clearly, Electronic Communication Networks offer significant advantages, however, it is important for you to choose the right broker. Trading over the Electronic Communication Network does not process through any kind of regulated exchange.
Due to its decentralized nature, your success and failure in the Forex trade market could be dependent on choosing the right broker. There are various brokers available that offer a host of features. Before you decide to use a particular broker, it is important to make sure that the ECN broker that you are considering does not have a dealing desk. If there is one, it is more likely to be a Market Maker and can deal against you. Thereby, being disadvantageous for you. To make sure that the ECN browser you use is reliable, you must find a regulated ECN Broker that carries the stamp of one of the regulatory bodies like the 'Financial Service Provider Register.' ECN browsers must also offer variable spreads to the users. Additionally, this is something that must be explicitly stated in the terms and conditions.
While there are numerous advantages to using an ECN Broker, there are also a few disadvantages that you must be aware of. The biggest disadvantage is that you must pay in order to be able to use an ECN broker service. An ECN broker will charge a commission on every trade that it performs, in addition to the initial expense. As a result, if you participate in forex trading quite frequently, the fee can accumulate to become a considerable amount. Another issue that one commonly faces is that a larger number of market makers disguise themselves as ECN brokers. In addition, by providing a high amount of commerce, ECN brokers could essentially behave like Market Makers and control the prices in the market.
Trading over the Electronic Communication Network or the Alternative Trading System is clearly the future for Forex trading. However, as a Forex trader, you must understand that trading over the ECN is performed through brokers. The type of broker that you choose could make or break your trading career. As such, it is important that you choose the right broker.