There are two basic types of brokers in forex market; one is the market makers and the other is ECN Broker. ECN stands for Electronic Communication Network. In simple words ECN is a financial expert who provide a direct route to its customers so that they can interact with other market participants. ECN is a type of computer software that facilitates the trading outside the market so ECN broker only acts as a middle man between your trades, not as market maker.
Following are the some positive and negative points of using an ECN broker. These point will surely leads you toward a good decision in choosing a forex broker.
Positive points of using an ECN broker:
A number of benefits that you can get by using an ECN broker are:
Privacy of your trades:
ECN broker act as a middle man for your trades. So when you make a trade on ECN network, you are completely secured and you account cannot be distinguished and not traced. You can protect your trade strategy by using an ECN broker because you are using the name of broker for your trades.
Become your own market maker:
Using an ECN broker you have a liberty to set your spread so you can set your limits himself. The ECN will match your bid with the other participants and through this you can gain some extra pips. There are no restrictions and limitations about placing and canceling an order. In this way you can perform as your own market maker.
ECN provide you the liberty to trade during news and events. Trading always remains continuous on ECN and through this you can also gain the advantage of price volatility.
Enhance the execution of orders:
Always keep it in mind that you are trading with ECN actually you are placing your order by using ECN. The ECN is only matching your order with the other market participant on the ECN as quickly as possible. With the help of ECN, you can easily compare your orders and also check the best price level of a currency pair offered in the market. Through this you can increase the execution of orders.
Increase Price volatility:
In ECN prices are not constant and change can occur too quickly. This can increase the price volatility. In this situation the scalpers and the short term traders can quickly claims large profits. ECN brokers are fit for scalpers.
ECN make it easier to allow different parties to trade with one another, without any restriction of geographical boundaries. This leads to greater liquidity (i.e. there are more buyers and sellers) which increases the efficiency of the markets.
Some potential disadvantages of using ECN brokers are:
The commission is charged on every trade in ECN. Sometimes due to low spread the traders have to bear loss because their earning is less than the commission they paid.
You are acting as your own market maker in ECN. High capital is needed to influence the market parameters. ECN is not ideal for small investors.
Dishonest market makers:
ECN provides liberty to become market maker to every person. So there are chances that some dishonest persons can easily influence the market by introducing a great volume of trade. Also there are many brokers who are not ECN brokers but they are advertising themselves.
ECN forex broker is a financial expert who acts as a bridge between buyer and seller and facilitates them in their trade. Low spread,high volatility and privacy are the major benefits of using an ECN broker. But the disadvantages attach with it are high capital and commission. Have a look at your trading strategy and financial status, then decide properly.