Best ECN Forex Brokers for 2024

Did you know?

ECN stands for “Electronic Communication Network”, and is a system of forex trade transmission and execution which relies on external fulfillment of client orders outside of the broker’s facilities. ECN forex brokers are forex brokers that use the ECN technology in the order transmission and execution process for their clients.

There has always been some confusion as to whether the ECN forex brokers are the same as DMA forex brokers. There are similarities between the two types, but also some key differences. ECN brokers operate a non-dealing desk, just like the DMA brokers. But the key difference is that unlike the DMA forex brokers that send their clients’ orders to the interbank market, the ECN brokers will send their clients’ orders to another brokerage entity (and not the interbank market) for execution. So it is possible that the clients’ orders may end up with a Tier-2 broker, or with another broker that will take on the order in-house using a dealing desk.

This is the difference between the ECN forex brokers and the DMA forex brokers.

Understanding the ECN Process

To understand the ECN brokerage processes, we need to understand how exactly the forex market works. The wholesale market where currencies are offered for sale is known as the interbank forex market. This is a virtual market which has no physical location. Rather, the market is actually a network of computers and trading stations from the different big banks that constitute the liquidity providers.

Banks are usually the largest interbank market participants. They trade huge volumes of currencies running into billions. Some of this money comes from banks that act as commercial traders, who simply come to the market to fulfill the FX needs of their clients (importers, international trade companies, etc). Occasionally, some central banks also come to this market to intervene on their specific currencies. Currency interventions usually require buying or selling a huge amount of one currency against another, in order to swing the demand-supply balance of the currency pairs in their desired directions. Then we have the major banks that are classified as the liquidity providers (LPs). They trade currencies with other banks, commercial banks, investment banks, prime brokers and market makers in large volumes, at what can be described as wholesale pricing conditions. As this is a market where there are no monopolistic forces at work, bid-ask prices of various currency pairs are not usually the same as you move from one liquidity provider to the next.

Prime brokers (also known as Tier-2 brokers), are participants in the interbank market. However, their clients are not the end-traders, but the ECN brokers. ECN forex brokers basically operate as agencies or facilitators. Since they do not operate a dealing desk, they have to look for external venues for fulfillment of their client orders. So what they do is use aggregator engines to bring together several bid-ask prices from various liquidity providers using the mid-office and back office facilities of the electronic communication network, and send these to the clients. Clients will see these prices at the front-end of the network (an ECN platform such as Currenex, cTrader or LMAX), trade by clicking the desired bid-ask price, and by clicking the order button, these are sent back to the ECN forex broker’s back office. From here, the ECN forex broker will transmit these orders to the prime brokers for fulfillment.

Some ECN brokerages are also white-label extensions of the prime brokerages, which provide a seamless arrangement for order fulfillment. Typically, traders will pay a commission on trades, but get a trade-off by getting reduced spreads on their trades.

What Do ECN Forex Brokers Do?

ECN forex brokers play several functions in the market. Let's take a closer look at general ones.

A) Price Aggregation and Transmission of Orders for External Fulfillment

ECN forex brokers aggregate price quotes from various banks that act as liquidity providers and transmit these bid-ask prices to their clients. This enables their clients to select the bid-ask prices that they find most suitable. On selecting a particular bid-ask price quote and clicking on the order button, the trade quote is transmitted by the ECN forex broker to the liquidity provider that owns the selected price for execution. The orders are never filled or tampered with at the level of the broker’s dealing desk.

B) Depth of Market (Level II Quotations)

Another hallmark of ECN forex brokers is that they provide a Depth of Market book, which is basically an order book that shows the price at which various market participants are placing either buy or sell orders, as well as the order volumes at each price. For instance, you may see a range of prices for the EUR/USD that starts from 1.13453 and extends to 1.13467. Between the spectrum of prices which have been defined above, with 1.13453 acting as a price floor and 1.13467 acting as a price ceiling, we will see some buy orders and some sell orders within the spectrum. We will also see different volumes at play. For instance, it is possible to see a volume of 3.45 lots for a sell order at one price, and at another price, you may see an order volume of up to 1,230 lots for a buy order. Such information can easily be used by traders to know where heavy volumes are congregating, the type of orders being seen where the heavy volumes are located, and therefore where the market is likely going to head in a short while as the heavy volumes begin to dominate the market.

C) Technology Provision

Trading on ECN platforms requires technology that is different from what market makers offer retail clients. Therefore, traders on ECN platforms tend to get more specialized tools for faster trades and speedy executions. The trading platforms are also built separately and are suited for price aggregation and order transmission.

ECN Broker Advantages

There are many advantages to using an ECN forex broker:

• Pricing seen by traders is wholesale pricing from the interbank market, so spreads are not marked up and are typically low.
• What you see is what you get when it comes to pricing. As the ECN forex brokers are not directly involved in the trade process, there is no slippage and traders are not asked to requote their orders.
• Trading engines are faster and built for faster executions as well as the use of algorithmic software.
• ECN forex brokers are especially suited for high volume/high frequency traders such as scalpers and those who deploy high-frequency trading algorithms.

ECN Broker Disadvantages

ECN forex brokers have the following disadvantages:

• Spreads may be low, but they are not fixed. During high volatility periods in the market, spreads may widen considerably.
• Traders are charged commissions for opening and closing positions on ECN forex broker platforms.

We have a list of ECN forex brokers you can trade with in order to get transparent pricing, speedy execution of your trades, and conditions that are favourable for scalping. You get no slippages or requotes when trading with these brokers.