The Concept
An ECN account, which stands for Electronic Communication Network, is an account linked to a network of Tier-1 Banks, Prime Brokers, and FCMs, all connected to form a deep pool of liquidity available for trading.
An ECN broker, as it’s name indicates – is part of an electronic communication network which, means that it has direct market access to a pool of liquidity providers. Tier one Banks and other large financial institutions all contribute prices to this pool and the brokerage is then able to select the best execution price for their clients from many different sources.
This network enables a broker to give its clients exceptionally low spreads as a result – helping traders who use strategies such as scalping. The lower the spread, the larger the chance of traders being able to accumulate small profits from scalping.
Benefits
Pricing
As the diagram above illustrates, the MetaTrader4 Server sits behind a price aggregator, which is responsible for receiving market prices from connected liquidity providers, selecting only the best Bid and the best Ask individually, and posting them to the MetaTrader4 Market Watch.
This mechanism ensures that holders of an ECN Account are receiving the lowest forex spreads available amongst major providers at all times.
Execution
On the other hand, the MetaTrader4 Server is connected via a FIX Protocol Bridge to an ECN platform, which is responsible for matching trade orders with the best available liquidity-price combination at the moment of receiving your order. It then sends it to the counterparty bank for execution. Keeping in mind that we the broker discloses the Price, Direction (Buy or Sell), and Instrument, your orders should always be treated anonymously and fairly.
This process is usually done in microseconds, due to the high-speed messaging of FIX API Protocol (Financial Information Exchange), which was designed mainly for this purpose.
Benefits
a) No conflict of interest
Since all ECN trades are executed at the counterparty bank directly, there is no interference in the execution process and the broker only benefits from a fixed fee per lot.
b) Trading Freedom
As a broker should accommodate and support a trader’s needs, with most brokers the client’s right to implement their desired trading technique is paramount. Having an ECN Account in place, the trader should be able to implement the following strategies:
- Scalping
- Hedging
- Automated Trading (EAs)
- Gridding (as long as it does not overload the broker’s trade server).
c) Tighter Spreads
While using an ECN Account, spreads as low as 0.8 pip on all majors should be available, since these spreads are raw spreads directly from the inter-bank network they often float much lower than any other traditional account with fixed or variable spreads.
d) Accurate Execution:
ECN forex trading guarantees that all market participants are equal with respect to: instant access to prices provided by leading FX banks on a strict price/time model, without intervention from any dealing desk and without requotes, due to very high liquidity.