Choose a good broker is one of the basic rules more important for a trader. It is not just about the quality of a broker but also the type.
It is reasonable to think that when it is about ECN, a trader has gone from being a beginner to an intermediate or even expert level.
What is ECN and how works ECN brokers?
ECN means Electronic Communication Network, a system that brings together quotes from banks (that provide liquidity) and traders. It automates the process of clearing and settlement of trading matching the orders from the counterparts.
It is like a bridge linking smaller market participants with Major Banks and ECN broker is the name of this bridge.
If this is true, it means that between the investor and the market there is almost nothing. It is a very short ‘supply chain’. So, one of the reasons why ECM is done for expert traders, is that intermediation is reduced to a minimum.
Due to the limited range of action of brokers, ECN SPREADS are much smaller than those used by everyday brokers. Traders can enter the market at lower prices, risking less money on their operations. Although this is an advantage for traders, as you already know, spreads represent a gain for the broker. This is why electronic communication networks brokers charge clients a fixed commission per transaction. ECN brokers cannot trade against their client so there is no need to manipulate the price. They consolidate bank quotes and show the best bid and offers available.
Here a list of the best ECN brokers: FXCC, FXPro, Gain Capital, Admiral Markets, Dukascopy, MB Trading etc…
The VELOCITY of trading represents also an advantage.
Without intermediation (even if brokers never leave completely the trader) it is possible to communicate directly with the market itself, so the execution of transactions is immediate.
This justify even the fact that ‘scalping’ (open/close positions of various financial products in a very short time) is permitted on ECNs.
From the exchange of information directly with the market, comes another advantage: the AVAILABILITY OF INFORMATION typical of ECN. Everything is all there, for those who can read: the amount of liquidity, the selling or buying situations of an asset and so on.
An advantage is also the ANONYMITY.
All ECN trading activities are totally anonymous. This enables traders to deal on the real market conditions only and they are not biased against the client’s direction based on strategies or current market positions.
Obviously many advantages correspond to disadvantages such as the complexity of this type of brokers or commissions.
Also ‘stop losses’ represents a disadvantage; essentially they do not exist. Without intermediation there is nothing that can guarantee the invested money.