The world of Foreign Exchange Trading (FOREX) is complex enough, but the introduction of Electronic Communications Networks (ECN) has added another tier to the world of currency dealing.
Background
ECN trading has been around since 1999, though in those days it was called Currenex. One of the main advantages of an ECN Forex broker is that the trader has direct access to banks and hedgefunds and any other Forex players. This means that the broker earns money through commissions and the success of its traders. A brokerage house that doesn’t use an ECN platform can sometimes be seen to be actually gambling against its traders.
The ECN system is transparent and it is allows deal to be placed on single click execution. This type of trading is best suited to experienced traders. Quite simply, ECN takes out the middleman and allows traders to deal directly with the major market players.
ECN advantages
Experienced traders who have access to ECN brokers claim that you can get better bid/ask offers as you will have access to a diverse number of sources. The fact that your broker will pass on your order directly to a bank or other traders will work to your advantage.
On the downside, some of these trading platforms are difficult to use if you’re inexperienced, they are not always user friendly. They can prove to be expensive, as you will have to pay a commission on every transaction. You will, though, have access to additional liquidity as you’ll be able to raise liquidity directly with some of the major banking houses, including Goldman Sachs, RBS and all the other famous tier 1 institutions.
Another major ECN advantage is that the trader can have greater access to credit options, if needed.
Market makers
The market maker quite literally makes the market, they will set the bid/ask price and they will buy and sell to traders and from traders. One of the main disadvantages of using market makers over an ECN system is that the market maker will always set currency exchange rates to their own advantage. Market makers generate the difference between the bid and the asking price, the spread, and this is why some of these brokers will be seen to delay an order or even gamble against a trader.
An ECN platform allows a trader to assess the best prices from other market makers and then trade accordingly in their own best interests. There are certain benefits for a trader to use a market maker, however, there is less price volatility than those experienced on ECN platforms and their software platforms can be easier to use. It’s harder to use ‘scalping’ as a practice if you use a market maker. Scalping can be compared to the activities of ticket touts who corner the market in a certain product, and then resell the tickets to an investor at a far higher price as a result of their activities. Scalping is perfectly legal and allows traders to make small gains on a series of very fast trades but the speed of these transactions is more favourable for those who use an ECN platform.
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