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ECN brokers are very popular in the Forex world these days, mainly due to the increased conflict between Market Maker Forex brokers and traders that have led to losses to the tune of billions of dollars for investors located across the globe. ECN is a widely accepted Forex trading protocol, known as the Electronic Communications Network (ECN), which serves as a central electronic system for market participants to exchange orders through a centralized clearing platform. ECN trading involves connecting traders, brokers, banks, and other market entities to a global liquidity pool, where different financial instruments such as stocks and currencies change hands without the involvement of a central exchange.
History & Relevance Of ECN Forex Trading
The modern aspect of Forex trading from mainstream FX trading companies is generally geared towards the retail trading market, which involves offering Forex brokerage accounts to small traders that invest only a small amount of trading capital when compared to the industry bigwigs. Intuitional Forex trading involves direct market access trading, where all orders are performed at the interbank level. Therefore, to accommodate the needs of smaller retail traders, Forex companies started adopting the market maker trading protocol, which worked on matching traders’ orders through an internal dealing desk. Market Maker brokers became an instant hit among retail investors, primarily due to the small capital outflow and an insane amount of leverage that facilitates trading on margin. Market maker brokers were able to offer trading accounts for as low as $5 trading capital, which were supported by leverage as high as 1:3000. Together with the rise in popularity of online trading platforms during the early part of the 2000s, Market Maker protocols were considered to be at the pinnacle of online Forex trading. However, Market Maker brokers had their distinctive disadvantages, which includes the high cost of trading (spreads) and an increased conflict of interest between a broker and the trader. A market maker acts as the counterpart to a trader’s order, and it is up to a broker to decide whether they wish to pass on the opposite end of an order to other traders, or absorb them completely. Such a situation gave rise to market manipulation, where brokers purposefully created adverse trading conditions to ensure that the company profits from their clients’ losses. Increased spreads, lack of accuracy in price quotes, platform manipulation, and other unethical trading behavior contributed to a less-than-favorable trading environment, which led to the rise in popularity of ECN Forex brokers.
Understanding The Concept & Operating Structure Of ECN Forex Brokers
ECN Forex brokers operate on an entirely different protocol, which reduces the conflict of interest between a trader and a broker significantly. Active traders and professional investors always make it a priority to trade on ECN or Direct Market Access (DMA) protocols, in order to enjoy higher liquidity and better transparency in pricing. To understand the concept of ECN trading in detail, you will need to understand how Forex brokers operate in the markets. A Forex broker is a market intermediary that acts as a link between an investor and the market. The primary responsibility of a Forex broker is to facilitate a transaction at market price, where the underlying instrument can include Forex currency pairs, stocks, commodities, indices, metals, and ETFs. Brokers may adopt numerous trading protocols, platforms, and environments to ensure that they can offer market access to their clients using the best account packages. In reality, Forex trading, or investing in any other financial market in general, does require a high amount of trading capital. Forex trading was only included in the speculative investment category in recent times, as FX trading primarily involved exchanging currencies for meeting debt, purchasing goods, and paying for services through a global forum. However, once speculators and investors started understanding the benefits of betting on price movements, Forex trading quickly gathered momentum in the retail trading market. Such a rise in popularity led to the creation of market maker Forex brokers that allowed its clients to speculate on the volatility of the currency markets. Market maker brokers are also known as dealing desk brokers, where all orders are transmitted through a company’s dealing desk. Market maker brokers would act as a counterparty to a trader’s position, by absorbing the opposite end of their clients’ orders. Essentially, if a trader is long on the EUR/USD, the broker would sell the pair in the market to hedge its position against market volatility. At times, market makerFX brokers may also be able to pass its orders internally to other clients, by matching two traders who wished to buy and sell a currency pair with similar lot requirements. Although market maker brokers became a hugely popular and a common occurrence in the Forex market, traders began to realize that FX trading companies were not all that honest in their approach to their trading services. Fraudulent and dishonest brokers were using several means to trick their clients by offering incorrect price feeds, manipulating the platforms, and by trading against its clients to ensure that their traders lose their money in the markets. Therefore, dealing desk brokers earned a vast amount of negative reputation in the market, as coupled with the risks and volatility of the markets, Forex traders started losing a significant portion of their trading capital.
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The Introduction Of ECN Platforms On FX Trading
The ever-rising risks involved in trading with dealing desk brokers forced traders into exploring alternative options in the market that did not have any conflict of interest. Therefore, ECN Forex trading began to take root in the market, which basically provided a conflict-free trading environment that allowed traders to access the market liquidity through a global liquidity pool. An ECN trading network is comprised of global liquidity providers such as banks and interbank exchanges, where the price is freely floated according to the depth and liquidity of the markets. ECN Forex brokers make use of advanced trading protocols by connecting traders to ECN servers that are connected to a global liquidity pool, which gives access to live price feeds and market orders. An ECN network is an open network, which allows traders to get real-time information on the market liquidity, pending orders, open orders, and live market quotes that have the best spreads due to the increased presence of both retail and institutional traders. Orders are executed at market price, where positions are filled based on price settlement. The constant volatility of ECN networks, along with the presence of large market players ensures that traders can open a large position in the market without the worry of any requote. However, trades may be susceptible to instant price fluctuations, which can lead to slippages, and in other cases, partial order fills. Real-time liquidity does have its drawbacks, which can result in excessive slippages during low-volatile market conditions. Hence, traders must be aware of the different aspects of ECN trading before committing themselves to the risks of the market.
The Main Points In Support Of FX Trading With ECN Forex Brokers
- Low Spreads – ECN trading aggregates price from different liquidity providers and traders in the market, which keeps the spreads extremely competitive. Most major currency pairs are known to have 0 pip spread during highly volatile trading conditions, which does keep the costs down for a majority of traders.
- High Liquidity & Volatility – ECN networks have the highest liquidity in the markets that is capable of filling any order of any magnitude. Of course, while orders are filled at the market price according to the existing volatility, ECN trading does guarantee orders to be filled at market price, without any requotes or order rejections.
- No Conflict Of Interest – ECN trading is performed over a No Dealing Desk trading protocol, which provides direct market access trading for investors. All orders are passed directly to the market, which is filled at the existing market rates that prevent any conflict of interest between a broker and the trader.
- Transparency In Pricing – ECN provides transparency in pricing, along with the ability to read the market liquidity and the depth of the market. ECN traders can receive real-time information on all the market orders, which is one of the primary reasons why ECN traders have reported to enjoy far more flexibility in ECN accounts than market maker accounts.
- No Dealer/Broker Intervention – The absence of a dealing desk means that a broker cannot interfere with their clients trading strategies. An ECN broker cannot manipulate the price, tamper with the platform, or create unfavorable trading conditions, thereby offering the best trading conditions for ECN traders.
- Perfect For Large Traders – ECN is more often the preferred trading protocol for large traders and institutional investors, due to the direct market access trading conditions and the reduced conflict of interest. Larger traders can also benefit from competitive spreads and better pricing, which contribute to a low-cost trading environment.
The Risks & Cons Of ECN Forex Brokers
- Commission Of Trading – ECN Forex brokers charge a nominal commission for trading, which is either charged as a percentage of the trading amount or as a fixed fee for a lot traded. Sometimes, ECN FX trading companies may also incorporate their commissions into their spreads, which may prevent traders from enjoying zero spread trading. ECN brokers receive their revenue from the commission, and traders are expected to factor in the commission to their trading before opening or closing their positions.
- Slippage – ECN networks have significant volatility, which can see the price changing by tens or even hundreds of pips within a fraction of a second. Since there isn’t any dealer-specific restriction on trading during volatile conditions, traders may experience significant slippages that can either be positive or negative. In certain cases, slippages can be highly risky, particularly if a trader uses high leverage for trading.
- No Fixed TP/SL – One of the main allures of market maker brokers is the ability to trade using fixed trading conditions such as guaranteed take profit and stop loss. However, in ECN trading, the markets are on a consistently volatile trading scenario, which cannot guarantee that orders are filled at predetermined levels. Therefore, traders will have to be proactive in ensuring that they have manual control over their trading accounts in case their fixed predetermined trading levels are not triggered.
- High Capital Requirement – ECN trading is not suitable for smaller traders, as direct market access conditions warrant for a higher trading capital. Most ECN Forex brokers will stipulate a higher minimum trading capital, which makes it out of reach for the average trader. Nevertheless, traders may be able to find ECN brokers that do not require higher trading capital, especially by registering for an ECN account at our recommended Forex brokers.
How To Understand The Authenticity Of ECN Forex Brokers?
While ECN Forex brokers have been primarily known to offer high-quality trading services, there are a huge number of scam brokers in the industry that offer a regular market maker account on the pretext of an ECN account offering. In some cases, Forex brokers may also offer an STP (Straight Through Processing) protocol, which is nothing but a hybrid of the market maker and ECN account protocols. Therefore, as a trader, you should have a precise understanding of the different ECN features before choosing an ECN Forex broker. Here are some of the standout features of an ECN FX trading account:
- DMA Trading: ECN allows direct market access trading that does not involve any type of interference from the broker. The broker does not use either a manual or automated dealing desk, and as a result, all orders are filled at market price at the existing liquidity. ECN accounts do not face any issues of order rejections, requotes, or cancellations.
- Competitive Spreads At The Expense Of Commission: All ECN accounts offer highly competitive spreads that even guarantees 0 pip spreads for major currency pairs. Therefore, ECN companies will charge a commission, which can either be included in the spreads as a markup or involves a fixed fee for the number of lots traded. The market maker or STP brokers, on the contrary, have higher spreads and don’t charge any commissions or fees for transactions.
- Market Depth Information: ECN traders are connected to a global liquidity pool, where traders have access to information such as market depth and liquidity. Traders can witness the real-time orders taking place through their platform, which is unavailable through a regular market maker or STP account.
- Slippages & Partial Fills: Market volatility is a key ingredient of ECN accounts, which is why traders will have to account for significantly higher slippages than those witnessed in market maker or STP accounts. Liquidity of the markets may also lead to partial fills off orders, where the orders are filled according to the market depth.
- Maximum Cap On Leverage/Higher Minimum Margin Requirements: It is impossible for ECN Forex brokers to offer higher leverages, although some Forex brokers may offer relaxed rules on the minimum trading capital requirements. Normally, a majority of ECN dealers will have a mandatory minimum capital requirement that will begin at $1000, although it is not uncommon for FX brokers to offer ECN accounts for a lower trading capital such as $5.
Consider These Factors To Choose The Best ECN Forex Brokers
If you want to find the top ECN Forex brokers, we can offer you some advice and direction that will help you to refine your search and make a choice much easier. Look for the following factors in an ECN Forex brokers to ensure that you find a reliable and top ECN Forex broker:
– Strong Regulation
You might have found out your perfect ECN broker that offers an excellent trading account with the best features, but your broker is only as reliable as the safety of your funds through proper regulation. Ensure that the broker of your choice is regulated by a dependable authority, one who stands by the investors by protecting them from broker scams and fraudulent practices. Strong regulation will not only ensure a reliable trading environment, but it will also provide you with long-term security and safety of your trading capital.
– Good Reputation
The fact that so many STP brokers claim to be ECN Forex brokers makes it even more important for the best ECN Forex brokers to have a good reputation. A broker should have an excellent reputation with its past and present clients, while it should have mostly positive reviews in online customer forums. A well-established Forex broker with many years of experience in the market, along with a good amount of positive reviews from existing customers is an excellent choice. However, new Forex brokers may also be able to provide a good quality Forex account, as they may be able to cater to the modern requirements by garnering positive reputation from new age traders.
– Original & Innovative Trading Features
The more unique features an ECN Forex broker has in comparison to the rest of the ECN competition in the market, the better. Brokers may come up with innovative trading features and great resources such as trading tutorials, live news feeds, market analysis, and trading signals, all of which can contribute to an excellent user experience. Of course, ECN brokers may also offer advanced trading tools such as VPS, which will further enhance your trading environment.
– Reliable Trading Software
The top priority for any trader should be to determine the reliability and performance of a trading platform before investing their time and money into an ECN Forex Brokerage. ECN brokers usually provide tried and tested ECN platforms such as MT4 and the cTrader, while some brokers may offer branded or proprietary trading platform that connects traders to an ECN network. The MT4 terminal is designed primarily as a market maker platform, which requires ECN bridges to connect a trader to an ECN network. cTrader, on the other hand, is built from the ground up as a dedicated ECN platform. Therefore, browse through different platforms options and choose a trading software that is best suited to your trading style. You should also choose a platform that is worth your investments, as you should never choose an unreliable trading platform that can potentially erode your trading capital.
– Generous bonus system
Special offers and promotions are one of the best features that can be offered by top ECN Forex brokers; however, you should never forget that bonuses are not the only thing that you should look for in a Forex trading company. Sometimes, a broker will give the wrong initial impression to gain a trader’s trust – for example; a dishonest and fraudulent ECN forex broker may offer very generous bonuses to mask their inefficiency and financial malpractices. On the contrary, several genuine Forex brokers are pretty honest in their bonus policies and trading conditions, which clearly outline the numerous terms that are associated with a trading account.
Why You Should Invest Your Money With Top Rated ECN Forex Brokers
ECN Forex brokers have the best trading conditions that clearly provide an edge to the traders without any risk of broker or dealer intervention. ECN accounts have no conflict of interest, are cheaper due to the spreads, and have high liquidity for all categories of traders. ECN Forex brokers also offer several ECN account features that allow traders to take complete advantage of the markets. Therefore, if you are looking for safe and secure Forex trading, and if you are concerned about protecting your funds from broker scams, you should definitely try your hand at Forex trading with the best ECN Forex brokers.