Broker to Trading

ECN stands for Electronic Communication Network. The Electronic Communication Network links the various participants in the Forex market. A broker will have its own particular connectivity consisting of whichever sources of liquidity it uses. On ECN accounts, the trader is normally charged a commission, added to the cost of the trade, the spread. Thus the total cost of the trade is the spread plus the commission charge. What this means is that the cost of a trade at an ECN broker is not necessarily lower than at a broker which effectively includes the charge as part of the spread. However ECN brokers can offer certain features which may be helpful for Forex traders.

There are different kinds of ECN brokers, though there are not necessarily clear divisions between different types. These brokers will typically provide an infrastructure to support rapid order processing. Some place their servers in Equinix data centres. These data centres contain the servers of banks, brokers and liquidity providers (which may include hedge funds and anonymous dark pools) the broker will use to make a trading order. These orders will be processed via by optical fibre and other technology to achieve what is termed low latency (delay), on the order of milliseconds.

So when the trader places an order it will normally be completed very rapidly (thought the time can vary). This may be useful to traders who want to make rapid trades in the market or for whom quick order fulfilling is important. It can also be useful for traders who automate the trading process to make rapid orders. This brings up another feature of ECN brokers, that they normally do not intervene in the order process (hence the name no dealing desk, or perhaps more pertinently no dealing desk intervention). Thus they will effectively allow a wide range of trading styles, which may not be allowed at other brokers. These can include styles such as scalping or trading into the news or high frequency trading.

Forex is typically the core market offered by ECN brokers. It is a huge liquid market which operates in a decentralised manner (i.e. there is no central exchange). Liquidity can vary from pair to pair, some pairs can be illiquid and liquidity for any pair can also vary. The most liquid Forex pairs (typically the major pairs) can also offer costs with a low variable spread (sometimes very low, reaching 0) and a lower average spread (a feature of less liquid markets is that prices can jump and spreads can widen).

Forex traders may use both discretionary trading (where they make their own trading decisions) and automated trading, where a computer makes the trading decisions on behalf of the trader. To indicate why this may be so, consider an approach which aims to make a number of trades using a strategy in the Forex market at a given time on an ongoing basis, utilising the capacity of this market to evidence price movement patterns generated from liquidity.

Firstly, the trader may not be always available to trade. Secondly human errors can creep in when a trader makes repetitive trades, perhaps rapidly. However computers do not have a problem with this kind of activity, in fact it is one of their strengths. They can execute a strategy tirelessly and accurately (excluding hardware, connection and other issues) day in day out.

Thus a trader may choose to automate this process, the Forex market may provide the required liquidity and the ECN broker can offer the technology to complete orders rapidly as well as the platform to apply automated trading strategies, such as Expert Advisors on MT4 and MT5 and cBots on cTrader. Thus to some extent it could be said that ECN and Forex can go together. To trade when their computer is disconnected from the broker, the trader may wish to use a Virtual Private Server (VPS) which hosts the trading strategies 24/7. A trader may also wish to use their own front-end and may be able to access the trader's servers directly using a FIX API.

Forex also contains a range of markets some of which are correlated to varying degrees, some of which are not. Thus it is possible to apply strategies to different Forex pairs, depending on market and other conditions, making Forex pairs themselves tools in a toolbox in an approach to trading. ECN and other Forex brokers will typically provide a range of markets, covering Major, Minor and Exotic Pairs, with perhaps 50-60+ or more pairs offered, depending on the broker.

However different traders can trade in different ways and may focus on one or a core group of markets and may wish to avail themselves of features such as rapid order processing and no dealing desk intervention and the charting and other tools on the platforms, rather than use them for trading automation. Nonetheless the capacity to do so remains. It should be noted that a trader does not need to trade at an ECN broker to use automated trading strategies, and other kinds of brokers offer trading platforms like MT4 and rapid order processing.

To automate trading, a trader can use ECN trading platforms. These are platforms such as MT4, MT5, cTrader and JForex (all of which also let the trader trade at their own discretion). However, a potential issue with automated trading is that it takes away the human element of discretion, and applying a strategy automatically can result in drawdown or losses in the trader's account, which they may or may not make up at the end point, whatever this is. Thus traders may wish to adjust strategies during the run. Equally, even if a strategy has performed well when backtested on market data, this does not means that it will perform well when it is applied to the real market. What this means is that automated trading is not a panacea, it is more like a tool, which may be useful given the way a trader can trade and may wish to trade in the liquid and varied Forex market.

ECN brokers do not only offer Forex, but can have a larger range of markets available by providing other CFDs markets, thereby offering a range of markets. These other markets may or may not have a commission charge, depending on the broker. As UK based brokers, these are all authorised and regulated by the UK Financial Conduct Authority (FCA).

To sum up, ECN Forex trading lets the trader access liquidity in the Forex market at potentially low spreads, but with a commission charge added to the spread, with rapid order processing and the capacity to trade range of styles, from discretionary to automated Forex trading. To do this the broker will provide an ECN trading platform which can support both automated and discretionary trading. It should be noted that ECN brokers typically provide other accounts types which do not charge a commission.