In Forex trading, there are several types of brokers that provide trading services and products to their clients: STP brokers, ECN brokers, Dealing Desk (DD) brokers, etc. STP (regular) brokers can be considered as the middlemen between traders and liquidity providers (companies that offer trading assets).
ECN brokers connect traders to liquidity providers directly, without getting in the middle of their relations. As for the ECN meaning, the term stands for Electronic Communication Network and the brokers that use this mechanism are platforms where traders and financial companies make direct contact with each other.
One of the main characteristics of ECN brokers is that they combine lots of price offerings (quotes) from different liquidity providers. This creates a platform where traders can choose the most suitable bid and ask prices for their interests and reduce spreads as much as they can. Not only that, brokers don’t usually take those spreads for themselves – instead, they use commissions to support their service.
Since traders and liquidity providers are directly connected, ECN brokers almost never interfere with the trading process of the two sides. And if the technical infrastructure works properly, the trading operation begins instantly. Even more, brokers cannot trade against their clients.
However, there are various disadvantages associated with ECN brokers. For instance, ECN brokers don’t offer micro-lots to their traders, they have fixed commissions for transactions, and the initial deposit requirements are usually very high.
An ECN broker is a forex broker that directly connects buy and sell orders through an electronic communication network (ECN). ECN brokers offer faster execution of orders and usually at more favourable prices. The alternative to an ECN broker is a dealing desk broker; one major problem that dealing desk brokers present for traders is that of re-quotes.
ECN brokers offer forex traders two primary advantages, which usually make for lower total trading costs for investors, which means higher net profits or lower net losses.
Forex trading doesn’t take place on a regulated exchange (like shares or other assets do), as it occurs between buyers and sellers from anywhere in the world, through an over-the-counter (OTC) market. To be able to access this market, you need to use a broker.
Full transparency since the broker directly connects your orders to other market participants. NDD (No Dealing Desk) technology ensures that there will be no re-quotes. Very low or even no spreads during times of high market volatility. The best bid and ask prices available since a variety of market participants are involved. The high price volatility makes for a great environment for scalping. Trading is facilitated not only during, but outside market hours.