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What Really Is An ECN and Do You Really Want One?

    

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What Is An ECN?

A quick google search will show ECN stands for Electronic Communication Network. Taking this as the definition every single FX trading platform would be classified as an ECN and indeed a lot of brokers use this simple definition to promote their offers as “ECN”. There is a second more detailed definition of an ECN understood by most professional market participants and increasingly understood and sought after by retail participants. This definition follows that an ECN is a trading platform that links best bids and offers from many different liquidity providers and market participants that are aggregated providing transparent and best execution.

Where Did ECN’s Come From?

10 years ago there were only a handful of ECN’s including EBS, Reuters, Hotspot and an upcoming Currenex. These were reserved for the large banks and hedge funds that needed multiple liquidity providers to execute either large or high frequency orders while the average trader was left dealing with retail brokers offering fixed spreads often as wide as 5 pips on EURUSD usually on a b-book system.

Thankfully the growth of the FX industry, increased competition and technological advantages have made it such that most traders can get access to an ECN via a prime of prime broker. This has become the new normal and there has been a huge surge in businesses setting up in the Prime of Prime space.

Why Would You Want an ECN?

Thanks to a glut of aggressive marketing now days, every trader insists they want an ECN solution with every broker proliferating this view by using the term ECN to simplify marketing messages and present a catch all best solution for every trader. Traders now assume that brokers marketing an ECN solution must offer them the most transparent service and best spreads and execution.

How Can This Be a Bad Thing?

Unfortunately, as is often the case in the FX market a combination of aggressive marketing and under educated consumers leaves many people disappointed. While there is no reason not to seek out a good ECN solution, traders need to do thorough due diligence on the “ECN” offering. Some helpful questions could be:

  • Where is the ECN hosted? – Only the major forex centers Equinix NY4, LD4 or TY3 should be acceptable.
  • How many liquidity providers are available? - 10 – 20 seems to be the sweet spot for brokers
  • How fast is average execution? - Less than 200ms should be aimed for.
  • Do you have average spread and slippage statistics? - Good brokers will track and share this.
  • Does the broker provide any enhanced protections like quote filtering and max spread size?
  • Without protection from the broker a flash move and wide spreads will hit stops too easily.

Conclusion:

A true ECN solution from a dependable broker is the new gold standard in retail trading but just because it says ECN on the label doesn’t mean that’s what you get when you sign up with the wrong broker.

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