Broker to Trading

While all online brokers are on the Electronic Communications Network (ECN), as this is how they function by connecting with liquidity, some brokers make use of the ECN in a way which can be called true ECN. Each broker has the set of sources of liquidity it uses. This is the broker's ECN (i.e. a broker's ECN is a subset of the notional full ECN).

The difference between a market maker and any kind of ECN broker, is that the market maker acts as a dealing desk between the trader and the broker and the ECN. ECN brokers however use algorithms to match client order with available liquidity, but through the broker (this technology is called Straight Through Processing or STP). This is why an ECN broker is sometimes referred to as one which avoids conflict of interest and no dealing desk. The advantages of STP is potentially one of speed, as computer programs route orders efficiently.

A broker may have one liquidity provider, but a true ECN broker is defined as one which has multiple sources of liquidity in some cases and in others where it is purely using algorithms for orders, that is it is a white label. The potential advantage of multiple sources of liquidity is the same advantage of having multiple suppliers, in that it may help the algorithms find lower spreads and more sustained lower spreads (potentially resulting in low average spreads, which may be seen at ECN brokers).

However there has to be market liquidity for an ECN to be able to find lower spreads, and thus the low spreads are typically seen on the most liquid major Forex pairs (for example EUR/USD or USD/JPY or GBP/USD or AUD/USD). While spreads for the most liquid Forex pairs may be very low, even down to zero, the broker normally adds its own charge, in the shape of the commission charge. The trader does not need to add this on themselves when placing an order, it is done automatically, it is a function of the way orders are being routed. However the trader needs to be aware of this cost, as the true cost of the trade is the spread (however low it is) plus the commission charge.

As can be seen there is potentially a speed improvement from the way orders are routed using STP, so ECN brokers may seek to take advantage of this by placing their trading servers in data centers, which use optical fiber cables to connect the broker's servers with other market participant (a physical realisation of part of the broader ECN). These various technologies from software to hardware can help produce very low latency. Latency is delay in the processing of data. Therefore orders can be routed in times as low as a matter of milliseconds.

Thus true ECN brokers are used by traders who use automated trading strategies which execute strategies on behalf of the trader (known as online trading robots). A robot may not necessarily perform better than a human as a trader, but they can have an advantage in terms of speed and accuracy in executing trades, and an ECN environment can help leverage this potential advantage.

So the core feature of true ECN can be seen as attempting to make full use of the algorithmic connected distributed structure of the market and its participants, to route orders efficiently and rapidly.

There is a difference between true ECN and direct market access (DMA). Direct market access is a way of trading directly into the market (for example placing orders directly into the market and accessing the primary order books). So it moves the trader further into the ECN, in effect and is for advanced traders. A true ECN broker can be seen as one which seeks to take advantage of the ECN, but still provide a trading environment the trader is used to at any broker.

As can be seen from the comparison table, the brokers in the table offer platforms which support both automated and non-automated trading (MT4, MT5 and cTrader). Traders who do not trade with robots, may appreciate ECN trading, as an ECN broker does not typically restrict trading styles (on their ECN accounts). Thus a trader can trade using a wide variety of techniques from news trading to scalping. Even if they use longer term approaches which do not depend on frequency or latency, then they may still find the trading platforms of interest as well as the potential to explore the possibilities of ECN trading. Forex is a complex market and the trader may wish to try a range of approaches to it.