What is an ECN forex broker? You don’t need to exert your imagination greatly to understand that without a good broker even the greatest forex trading strategy in the world is doomed to failure. Unless the software you use is up-to-date, stable and reliable, unless the information passed to you by the broker is timely, and correct, no matter how smart or deep your analysis is, the ultimate outcome is likely to be failure. In addition, regardless of your success or failure in trading, you have to compensate the broker for his services. You will pay him the spread when you make a profit, and also when you suffer losses. Clearly the broker is one of the most important variables in the profitability equation.
Traders who are weary of the broker approach, and who would like to test their talents in a different kind of relationship can try forex ECNs. The ECN (electronic communication network) is a kind of intermediary that is not a market maker. Its role is limited to passing the quotes supplied by liquidity providers to clients and charging a commission for this service. Unlike the broker, an ECN does not inflate the spread to compensate for its services. You are passed the exact same spreads as they are received from banks, and are charged a commission which can be larger or smaller depending on the size of the position opened.
The difference of the ECN forex broker approach should be obvious to most traders. The most striking difference is in the spread. Most traders, for example, complain that the broker artificially inflates the bid-ask spread at time of news releases in order to prevent traders from making profits, or for other reasons. This is never the case with ECNs, because first of all, the ECN software is not programmed to intervene in traders actions, and also because the ECN has nothing to lose from profitable trades of clients. Brokers, as market makers, hedge against client positions in order to net out their exposure to the banks. Brokers are the counter parties that banks deal with. ECNs, however, only convey information between traders and banks, and as such, do not have to counter trade their clients.
The cost of trading in with an ECN is the commission alone. You get bank quotes in their raw form, you can arbitrage them when there are short them imbalances, and all that you need to do is paying the commission, which is a reasonable amount in most cases.
We should add that a seasoned trader will ultimately observe little difference in practice between an ECN or a market maker (the broker). A competent broker does not inflate the spread artificially to make client trades impossible. As such, the commission and the spread are comparable to each other in the best cases. Although some traders habitually prefer ECNs over brokers, and admittedly the ECN forex brokers do possess some strong points, neither approach is a guarantee for profitability. The greatest burden and responsibility is on the shoulders of the trader, as it is always the case.