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.
Explaining ‘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.
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.
Further Reading
- The microstructure of a US Treasury ECN: The BrokerTec platform – www.sciencedirect.com [PDF]
- Limit orders and volatility in a hybrid market: The Island ECN – papers.ssrn.com [PDF]
- Brokerage commissions and institutional trading patterns – academic.oup.com [PDF]
- Institutional trading and alternative trading systems – www.sciencedirect.com [PDF]
- The quality of ECN and Nasdaq market maker quotes – onlinelibrary.wiley.com [PDF]
- Can Institutional Economics Inform the Efficient Market Hypothesis? – papers.ssrn.com [PDF]
- Evolution of online financial trading systems: E-service innovations in the brokerage sector – www.igi-global.com [PDF]
- Island tides: exploring ECN liquidity – papers.ssrn.com [PDF]
- Competition among trading venues: Information and trading on electronic communications networks – onlinelibrary.wiley.com [PDF]
