Are you considering investing in Forex? If so, then one of the first things you need to do is to choose the best broker for your trading needs. The lucrative nature of Forex business has attracted so many brokers that you may not know which of them to pick. While looking for the best fx broker, most people usually look at things like commissions, spreads, the reputation of the broker, etc. but ideally, your starting point should be checking which business model the brokerage company uses. Is the company a market maker or ECN?
ECN Forex Brokers
There are 2 main types of FX brokers that offer traders and investors access to the FX market using entirely different business models. These are ECN and a Market Maker. An ECN( Electronic Communications Network) broker is a FX broker that uses ECN to directly connect traders to interbank liquidity providers such as banks, hedge funds, and mutual funds. They are also referred to as non-dealing desk brokers meaning that your orders will be passed directly to liquidity providers without the help of market makers. ECN brokers.
Unlike market makers who are on the opposite side of your trades, ECN brokers match your trades between market participants, meaning that they cannot trade against you. They charge a commission on your traded volumes meaning that they want you to win so that they can make a profit. This is why ECN brokers are regarded as the purest form of FX dealers out there.
Benefits of Working With a True ECN Forex Broker
1. Complete anonymity
One of the benefits of using a true ECN broker is that they offer a higher degree of anonymity than market makers. This means that as a trader, you’ll be able to take advantage of neutral prices and only the real market condition will be reflected in the trading activity. Also, there’ll be no bias on the neutral prices based on your strategies, tactics or current market positions.
With a true ECN broker, you can also benefit from several technical efficiencies such as tight spreads and fast trade execution speeds.
2. More trustworthy
When it comes to financial investments, you want to entrust your hard-earned money to a broker that is honest and trustworthy so that you can get the most out of your investment. There are several reasons why ECN brokers are more trustworthy than market makers.
- An ECN broker utilizes the latest technology to ensure trade executions are fast and seamless and offers the best available market prices and affordable spreads.
- They make a profit by charging a commission on your traded volumes meaning they want you to win.
- They provide their traders with direct access to the interbank market so that they can trade on real market prices.
It’s because of this honesty and transparency that ECN brokers have a higher demand than market makers.
3. Access to Liquidity Providers
As mentioned before, ECN brokers provide their clients with direct access to liquidity providers which include banks and other institutional investors. Therefore, traders have an opportunity to trade with international liquidity pool of highly qualified, competitive and regulated financial institutions. This ensures fast execution of order prices.
4. Less Interference
This is probably the biggest benefits of using a true ECN broker. Majority of ECN brokers have a reputation of being knowledgeable, trustworthy and reliable. The reason for this is because they don’t need the help of a dealing desk, meaning they have more flexibility than market makers when dealing with their clients’ orders. This flexibility enables ECN brokers to execute their clients’ orders without interference.
Risks of Working With a True ECN broker
The risks of working with an ECN broker are very few and those that exist affect mostly small retail traders. Here are the two disadvantages of using a true ECN broker you should bear in mind.
1. Variable spreads
ECN brokers offer variable spreads that are usually dictated by the current market conditions. Sometimes, these spreads can change drastically especially when there’s high volatility which can affect your trading strategy and affect your open positions.
2. Trading Costs Can be High
Working with a true ECN broker who directly connects you to market participants that include big financial institutions comes with a huge price. One of them is a high initial investment required to open an account with a true ECN FX broker. Some brokers also charge a commission as high as $3.50 per transaction, which can be unsustainable for retail forex traders.
While using an ECN forex broker like Pepperstone comes with many benefits, there’re also a few notable risks that as a trader you should bear in mind. Small retail traders, who have limited financial muscle, may find it difficult to use a true ECN broker and therefore prefer market makers. However, if your budget allows, ECN brokers are the best if you want to make good money in Forex.