The forex market is a massive worldwide market in which transactions are carried out over-the-counter (OTC) between agreeable sellers and buyers from all over the world. Since this system of market participants is decentralized meaning trading does not take place in a centralized exchange, the exchange rate of any currency pair at whatever time may differ from one broker to another.
The key market makers in the forex world are the biggest world banks, and they form the interbank market where most trading activities occur. Small individual forex traders can’t enter the interbank market since they don’t have credit relations with these big players. This doesn’t mean that individual forex traders are excluded from trading forex, they can do so chiefly via means of two types of forex brokers: electronic communications networks (ECNs) and markets makers.
ECNs offer currency prices from numerous market participants such as market makers, banks and other traders linked to the ECN, and show the best bid/ask quotes they can offer on their forex trading platforms basing on these prices. What is more, ECN forex brokers function as counterparts to forex transactions, but they work on an agreement and not on the pricing base. In contrast to fixed spreads suggested by some market makers, currency pairs’ spreads differ on ECNs in relation to the pair’s trading activity. In the times of extremely active trading periods, a forex trader can sometimes have no ECN spread at all, especially in very liquid currency pairs like the majors (USD/JPY, GBP/USD, USD/CHF and EUR/USD) and some cross-currency pairs.
Real ECNs don’t have any impact on the determination of the prices; as a result, the risks of price manipulation are decreased for individual forex traders. The pros of ECNs are the following: firstly, currency prices can be more volatile, which is better for scalping purposes; next, real ECN brokers will not trade against a forex trader since they simply forward his/her orders to a bank or another trader on the opposite side of the transaction; and, what is more, generally a forex trader is able to receive better bid/ask prices since they are derived from several sources.
However, there are some cons as far as ECNs are concerned: to start with, forex traders are obliged to pay commissions for each transaction; secondly, ECN’s trading platforms are likely to be less user-friendly; and finally, it can be harder to calculate stops in advance since variable spreads between bid/ask prices are used.
On the whole, a Forex trader can make his/her decision on whether to use an ECN as a forex broker or not based on the strong and weak points of this type of forex broker, which are mentioned above. Though, it is very important to mention that the choice of a forex broker that a trader will feel comfortable with plays a crucial role in the effectiveness of the forex trading process.
This article was written by Alexander Collins, the CEO of Forexeasystems as well as chief developer of Forex trading strategy ProFx. You can download the following for free on their website: MT4 custom indicator that shows actual Forex news, Fibonacci calculator, Camarilla calculator and much more.