What is an 'ECN Broker'

An ECN broker is a forex financial expert who uses electronic communications networks (ECNs) to provide its clients direct access to other participants in the currency markets. Because an ECN broker consolidates price quotations from several market participants, it can generally offer its clients tighter bid/ask spreads than would be otherwise available to them.

BREAKING DOWN 'ECN Broker'

Since an ECN broker only matches trades between market participants, it cannot trade against the client, an allegation often directed against some unscrupulous retail forex brokers. Because ECN spreads are much narrower than those used by everyday brokers, electronic communication networks brokers charge clients a fixed commission per transaction.

An ECN Broker facilitates trades for interested investors across the ECN. Due to how the ECN functions, working with brokers of this nature often results in lower fees as well as additional trading time availability.

Understanding the Electronic Communications Network

The ECN provides an electronic system for buyers and sellers to come together for the purpose of executing trades. It does this by providing access to information regarding orders being entered, and by facilitating the execution of these orders. The network is designed to match buy and sell orders currently present in the exchange. When specific order information is not available, it provides prices reflecting the highest bid and lowest ask listed on the open market.

Benefits of the Electronic Communications Network

The use of the ECN allows investors a way to trade outside of traditional trading hours, providing a mechanism for those who either can’t be actively involved during normal market times or who prefer the flexibility offered by wider availability. It also avoids the wider spreads that are common when using a traditional broker, and provides overall lower commissions and fees. For those concerned about privacy, the ECN can provide a level of anonymity to those who desire it. This can be particularly attractive to investors interested in making larger transactions.

Due to how the information is transmitted, price feed transparency is also a byproduct that many consider a benefit. All ECN brokers have access to the exact same feed and trade at the precise price that is provided. A certain amount of price history is also readily available, allowing for easier analysis of particular trends within the marketplace. This helps limit price manipulation, as current and past information is readily available to all, making it more difficult to act unscrupulously. Additionally, no trader has a particular built-in advantage over the other, as they all have equal access to the information.

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