There are some essential concepts to grasp when forex trading and one that is not well understood is ecn forex.ECN stands for Electronic Communications Network.Ecn forex brokers provide a gateway to multiple liquidity providers feeding their prices via a trading platform to traders around the world. Before getting into the core of ecn forex it is appropriate to know what a broker with a dealing desk means?.
You have a large number of online brokers called market makers. These market makers are the ones who trade against your positions. What you should understand is that there is conflict of interest and if you lose all the funds in your trading account they will make bigger profits than if you triple your trading capital. And this self interest maximization perspective means that the market maker can manipulate currency prices to steal your money. In essence they “make the market” and as such have a precise idea where your stop loss and profit target are. And through stop loss hunting they can easily manipulate their currency prices and absorb slowly but surely all the money that you have in your trading account.This gets worst because these market makers also make their profits from the forex spread. And obviously this will tend to be wider allowing them to make higher profits.
In contrast ecn forex brokers offer very competitive spreads because they have access to multiple liquidity providers.More importantly ecn forex brokers only take the volume of orders and channel it to the best possible match elsewhere in the world. They do not trade against you and so there is no conflict interest.
Thus you are trading through your ecn broker who is in constant contact with other institutional traders. A client trader might have their buy order filled by liquidity provider “Bank 1”, and close the same order against liquidity provider “Bank 2”. The best bid and ask is displayed to the trader. Consider the following example:
Assume there are two banks Bank 1 and Bank 2.
And in this example Bank 1 buys (bid) at 1.3521 but sells (ask) at 1.3523. Bank 2 buys (bid) at 1.3522 and sells (ask) at 1.3524
This is shown as follows:
Bank 1 1.3521 1.3523
Bank 2 1.3522 1.3524
From here the best bid and ask prices for the tightest spread is displayed to the retail forex trader and is as follows:
Client price: 1.3522 1.3523 (1 pip spread)
Forex Trader 1 buys at the best ask price from Bank 1 at 1.3523 instead of 1.3524 from Bank 2.
And Forex Trader 2 sells at the best bid price of 1.3522 to Bank 2 instead of 1.3521 to Bank 1.
With the above example you can conceive that prices from a variety of instutional investors feed into an aggregation engine which then chooses the best buy and sell prices to display on the trading platform . Put simply the most competitive prices are always posted to the retail trader.Ecn forex is definitely more advantageous than brokers who have a dealing desk. It does not only give more security but also offers very competitive spreads to the small forex retail traders