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ECN Forex Brokers

There are just so many things to consider when looking for a good broker that sometimes it gets exhausting. That was perhaps a very pessimistic start to a post that promises to help you find the top ECN broker, but there’s some good news. What most people focus on the most are usually not the most impactful factors, and that is why searching for a good Forex broker gets exhausting. Instead, if you can focus your attention on just a few factors with the most impact, that will make the process easier and more effective. Think of it this way, why to focus on preparing the spices to a stew when the beef itself is not the right cut. The way a broker processes transactions, in this case, is the beef and a very important factor to consider. In general, it is always better to go for an ECN broker since they have the most favorable trading conditions. But even then, you still have to choose between several of them, and that will be our focus in this post.

What is ECN Forex broker?

The term ECN stands for Electronic Communications Network, and they are the only ‘true brokers’. By definition, a broker is supposed to connect buyers and sellers, without participating in the transaction itself but merely pocketing a commission. A good example is a real estate broker. Such an individual has no interest in the house being bought or sold, but their role is to connect a willing buyer and a willing seller. The same is true in the Forex market among true ECN Forex brokers. Their only job is to connect buyers and sellers of currency, without handling any of the money themselves.

To understand how this process works, it is better to use a hypothetical example. Imagine if you are a Forex trader and believe the euro will rise in value against the dollar. To make a profit on your expected price change, you would buy the EUR/USD pair, meaning that you are simultaneously buying the euro and selling the US dollar. Once you send this order to your ECN broker, they will then match your request to another party on the Forex market who wants to sell the euro and buy the US dollar. This means that they will be shorting the EUR/USD while you’re going long. This is the essential nature of the Forex market, and there are always willing buyers and sellers.

how ecn brokers work

To find you a counterparty, the broker will search through the interbank market. Your counterparty could be anyone ranging from other retail brokers on the ECN network, liquidity providers to big banks. The best ECN Forex brokers can connect you to a wide range of counterparties, ensuring that your orders are always filled quickly and at the best possible prices. In our previous example, suppose you had placed an order to buy 1 lot of the EUR/USD pair, the broker would then look for a seller with the least bid price so that you get the best price.

What makes the top ECN Forex brokers ideal to deal with?

The main reason why traders are usually advised to work with ECN Forex brokers is because they are the least likely to have a conflict of interest. As we have already seen in the structure of a top ECN Forex broker, their role is only to connect buyers and sellers. As a reward, they will charge a standard commission on each trade. Some people do not like being charged a commission on every trade, but it is usually more transparent than the alternative.

XM

XM Forex Broker Review

Minimum deposit

5$

Regulation

CySEC, FCA

Bonus

30$, 50%+20%

Maximum leverage

1:888

Year founded

2009

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MT4, WebTrader

Markets.com

Markets.com Review

Minimum deposit

100$

Regulation

CySEC, FSB

Bonus

N/A

Maximum leverage

1:300

Year founded

2008

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Custom

Plus500

Plus500 Review

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100$

Regulation

FCA

Bonus

N/A

Maximum leverage

1:300

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2008

Trading platform

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Forex.com

Forex.com Broker Review

Minimum deposit

250$

Regulation

FCA, NFA

Bonus

N/A

Maximum leverage

1:200

Year founded

1999

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EasyMarkets

EasyMarkets Review

Minimum deposit

25$

Regulation

CySEC, ASiC

Bonus

N/A

Maximum leverage

1:200

Year founded

2003

Trading platform

MT4, WebTrader

Z.Com Trade

Z.Com Trade Review

Minimum deposit

5$

Regulation

FCA

Bonus

N/A

Maximum leverage

1:200

Year founded

2005

Trading platform

MT4

Speaking of alternatives, these are the market makers. As you may guess from their name, these kinds of brokers create the market themselves rather than connecting you to other traders. It is also why they are not considered to be ‘true brokers’, since they have skin in the game. Such brokers are usually not advised because there arises a conflict of interest when you place an order. Say, you bought one lot of the EUR/USD pair with a market maker. That would mean they take the opposite side of your trade. If you profit from the trade, then they are losing money from their own pockets and vice versa. Such a situation makes dealing with these brokers risky since they can intentionally skew quotes in their favor, especially if you’re a consistent winner. On the other hand, very few on the ECN Forex broker list have ever been accused of such actions.

Some market makers will mask their operations and term them Straight Through Processing (STP), claiming that they are not market makers. However, they are still market makers, with the only difference being that they have automated the process. Even they have been caught in the past and penalized for manipulating market quotes in their own favor.

Besides the possibility of market manipulation, market makers also fill orders sometimes at a very widespread or at unfavorable quotes. Since they are creating the markets, it is up to them to determine quotes, and very often they tend to widen the spread so as to increase profits.

Are there any downsides to FX brokers ECN?

Although ECN brokers are the most recommended form of brokers, there are some downsides, especially to intraday traders and scalpers. Inasmuch as there may be several bad eggs, there are still some good market makers who don’t mess too much with the quotes. Such brokers are preferred by traders who make numerous trades per day and who would experience a high cost of trading if there was a commission incurred with every single trade. Therefore, ECN brokers may be more suited to position and swing traders who only make a few trades in a week or month.

Furthermore, it can be very difficult to tie down exact quotes in the markets. Think about it, if there are so many traders in the interbank market, how could you know at what exact price your order would be filled? You wouldn’t. All you can do is hope that you can find a good enough quote. This situation is usually exacerbated when there is high volatility in the markets or when trading exotic pairs. Therefore, you may find that, at some point, you’re experiencing slippage and actually losing money.

Are there any downsides to FX brokers ECN?

Is an ECN broker the best option for you?

Before we go into how one goes about choosing the best ECN FX broker, it is also important to ask whether that may be the best option. As we have already seen, ECN structures are not lacking any downsides, and a trader needs to consider this. One factor has already been mentioned, and that had to do with the cost of trading. Besides that, ECN accounts usually have higher capital requirements since they are usually targeted at individuals making huge trades. However, if you are still comfortable with these few downsides, then it is definitely recommended to choose this avenue over market makers.

How do you spot the best ECN Forex broker?

The first thing any trader needs to do is look into the company itself. Very often, traders fall for the catchy advertisements promising huge bonuses and high returns without question. Instead, what you should do is conduct thorough due diligence into the Forex brokerage and determine if it is legitimate. Remember that in the Forex market that is largely decentralized, there are many unscrupulous brokers who would not hesitate to take your money and disappear into the woodwork.

To find out if a company is legitimate, therefore, do a Google search. The first result will probably be from the company’s website itself. Do not ignore it, but go in and take a look around to spot any irregularities. If satisfied, now check for the regulatory license. This is a very crucial step and you will need to be very thorough. The license number is usually found on the ‘About Us’ page and once you find it, check it against the regulator’s website. Here, you will have to decide whether you feel comfortable with the regulator, especially if they are an offshore broker. It is not always recommended, but some offshore regulators can adequately keep their members in check and protect even non-residents.

Once done with their website, go through ECN Forex broker reviews online to ascertain whether there are any complaints against them. However, do not expect to find any Forex company with a 100% positive response, it simply doesn’t happen. There will always be some complaints for minor issues, but a problem arises when there is a pattern of misconduct. Perhaps there are a string of complaints regarding a particular practice, then you should avoid that particular broker.

Finally, determine whether the broker uses a true ECN system. To do so, there are some subtle cues to look out for. For example, ECN brokers do not have fixed spreads, but they will instead be variable. Any mention or allusion of tight spreads should be a red flag. Furthermore, they should not have any problem with the size of the order you place, or reject stop loss and take profit orders at any distance from the current market price. Remember that a true ECN broker only earns from a commission, which they earn either way if you win or lose. As such, they don’t place any limitations on the traders. Any indication that some orders are being rejected, and you know the broker is not a true ECN broker.

To confirm any of these tips, begin trading in a demo account to get a sense of the trading conditions. And do not be afraid to walk away if something doesn’t feel right. One thing I’ve come to learn in my years of trading is to trust your gut.