True ECN Broker vs Not True ECN Broker
Forum on trading, automated trading systems and testing trading strategies
Sergey Golubev, 2013.07.01 07:19
Just next educational article about ECN and so on - Market Makers Vs. Electronic Communications Networks
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The foreign exchange market (forex or FX) is an unregulated global market in which trading does not occur on an exchange and does not have a physical address of doing business. Unlike equities, which are traded through exchanges worldwide, such as the New York Stock Exchange or the London Stock Exchange, foreign exchange transactions take place over-the-counter (OTC) between agreeable buyers and sellers from all over the world. This network of market participants is not centralized, therefore, the exchange rate of any currency pair at any one time can vary from one broker to another.
How Market Makers Work
Market makers "make" or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market. As counterparties to each forex transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.
The exchange rates that market makers set, are based on their own best interests. On paper, the way they generate profits for the company through their market-making activities, is with the spread that is charged to their customers. The spread is the difference between the bid and the ask price, and is often fixed by each market maker. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers. As counterparties, many of them will then try to hedge, or cover, your order by passing it on to someone else. There are also times in which market makers may decide to hold your order and trade against you.
There are two main types of market makers: retail and institutional. Institutional market makers can be banks or other large corporations that usually offer a bid/ask quote to other banks, institutions, ECNs or even retail market makers. Retail market makers are usually companies dedicated to offering retail forex trading services to individual traders.
Pros:
- The trading platform usually comes with free charting software and news feeds. (For related reading, see Forex: Demo Before You Dive In.)
- Some of them have more user-friendly trading platforms.
- Currency price movements can be less volatile, compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.
Cons:
- Market makers can present a clear conflict of interest in order execution, because they may trade against you.
- They may display worse bid/ask prices than what you could get from another market maker or ECN.
- It is possible for market makers to manipulate currency prices to run their customers' stops or not let customers' trades reach profit objectives. Market makers may also move their currency quotes 10 to 15 pips away from other market rates.
- A huge amount of slippage can occur when news is released. Market makers' quote display and order placing systems may also "freeze" during times of high market volatility.
- Many market makers frown on scalping practices and have a tendency to put scalpers on "manual execution," which means their orders may not get filled at the prices they want.
How ECNs Work
ECNs pass on prices from multiple market participants, such as banks and market makers, as well as other traders connected to the ECN, and display the best bid/ask quotes on their trading platforms based on these prices. ECN-type brokers also serve as counterparties to forex transactions, but they operate on a settlement, rather than pricing basis. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs, depending on the pair's trading activities. During very active trading periods, you can sometimes get no ECN spread at all, particularly in very liquid currency pairs such as the majors (EUR/USD, USD/JPY, GBP/USD and USD/CHF) and some currency crosses.
Electronic networks make money by charging customers a fixed commission for each transaction. Authentic ECNs do not play any role in making or setting prices, therefore, the risks of price manipulation are reduced for retail traders. (For more insight, see Direct Access Trading Systems.)
Just like with market makers, there are also two main types of ECNs: retail and institutional. Institutional ECNs relay the best bid/ask from many institutional market makers such as banks, to other banks and institutions such as hedge funds or large corporations. Retail ECNs, on the other hand, offer quotes from a few banks and other traders on the ECN to the retail trader.
Pros:
- You can usually get better bid/ask prices because they are derived from several sources.
- It is possible to trade on prices that have very little or no spread at certain times.
- Genuine ECN brokers will not trade against you, as they will pass on your orders to a bank or another customer on the opposite side of the transaction.
- Prices may be more volatile, which will be better for scalping purposes.
- Since you are able to offer a price between the bid and ask, you can take on the role as a market maker to other traders on the ECN.
Cons:
- Many of them do not offer integrated charting and news feeds.
- Their trading platforms tend to be less user-friendly.
- It may be more difficult to calculate stop-loss and breakeven points in pips in advance, because of variable spreads between the bid and the ask prices.
- Traders have to pay commissions for each transaction.
The Bottom Line
The type of broker that you use can significantly impact your trading performance. If a broker does not execute your trades in a timely fashion at the price you want, what could have been a good trading opportunity can quickly turn into an unexpected loss; therefore, it is important that you carefully weigh the pros and cons of each broker before deciding which one to trade through.
Forum on trading, automated trading systems and testing trading strategies
Something Interesting in Financial Video October 2013
Sergey Golubev, 2013.10.10 14:44
147. An Introduction to ECNsThis video provides an introduction to electronic communications networks (ECNs), systems that allow buyers and sellers of stocks to trade directly without an intermediary.
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Most forex traders
participate in the forex market with forex brokers. There are mainly two
types of forex brokers: market makers and electronic communications
networks (ECNs). In this article we want to introduce the latter type of
brokers, the ecn forex broker.
What is an ECN forex broker?
ECN forex broker is a financial expert that provides the clients with
direct access to other forex participants in the currency market by
using electronic communications networks (ECNs). Unlike market makers,
which always trade against their clients to make profit, an ECN forex
broker only creates opportunities of trading between forex traders.
How does an ECN forex broker work?
The ECN
forex brokers provide a medium by passing on the prices for different
market participants such as banks, market makers and other traders in
the market. Then the best bid/ask quotes will be displayed on the
trading platforms based on these prices. ECN forex brokers also serve as
counterparties to forex transactions, but it is a settlement that they
operate on instead of pricing basis. While fixed spreads are offered by
some market makers, spreads of currency pairs can be very different,
determined by the trading activities of the currency pair. In active
trading periods, sometimes you cannot get ECN spread at all, especially
in those very liquid currency pairs such as the majors (EUR/USD,
GBP/USD, USD/JPY, USD/CHF) and some currency crosses.
Pros and cons of the ECN forex broker
The ECN forex broker has both advantages and disadvantages. The pros and cons of the ECN forex broker are as follows.
The pros of the ECN forex broker can be presented in following aspects.
Traders can usually get better bid/ask prices for they are derived from multiple sources.
At certain time traders may trade on prices with no spread or with only very little spread.
Genuine ECN forex broker will pass on the orders to a bank or other
trading participants on the opposite side of the transaction instead of
trading against the traders.
It is very likely that the prices on the ECN forex broker are more volatile.
Traders can take on the role of market traders to other traders on the ECNs since they can offer a price between bid and ask.
The cons of the ECN forex broker can be presented in following aspects.
Many ECN forex brokers do not provide integrated charting or new feeds.
Some trading platforms are not so easy for traders to use or operate.
Since there are variable spreads between the bid and the ask prices, it
may be difficult to calculate stop-loss and breakeven points in pips in
advance.
Forex traders are obligated to pay commissions for each transaction.
It is obvious that there are both pros and cons of an ECN forex broker. Traders have to take many factors into consideration when choosing a forex broker.
From my experience I can tell that ECN brokers (at least the 2 I've used) have better execution and lower cost in every trade, so that can be a real advantage to the trader that looks for speed and economy.
Especially if you are trading with an EA, these 2 factors (speed in trade execution and lower cost) can make all the difference.
Market maker broker: hold your trades as they know well that most traders loose their money
most brokers has the 2 systems of trading which are A or B book technology
if trader have a good trading history they usually put it on ECN servers (A-Book)
if trader have no idea or risk too muck without money management it will be on B-Book system
So which ECN brokers are you guys using and suggesting to use? I personally use ICMarkets.
If you want to be safe, my suggestion is to go with the brokers which have history (not new) and is well known.
Execution can be problem with different TRUE ECN brokers depends on circle of their LP'S.
if a comon question if you ask to broker what is maximum deposit limit market maker always avoids fro this but broker who sets your business between you and market they welcomes always.
Hello everyone, I'm currently using 2 accounts ECN Pro by 2 different brokers. The thing I find strange is that they have different spreads on the same pairs. Furthermore, applying on both the same scalper EA with same parameters setting and the same vps latency I get a completely different trading ... different operations and different profit. I expected more or less the same
Hello everyone, I'm currently using 2 accounts ECN Pro by 2 different brokers. The thing I find strange is that they have different spreads on the same pairs. Furthermore, applying on both the same scalper EA with same parameters setting and the same vps latency I get a completely different trading ... different operations and different profit. I expected more or less the same
The difference of spreads between 2 brokers its normal as each broker add spread from the liquidity provider price
A true ECN broker is not suppose to add "spread".
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I saw lot of discuss on internet on different forums where peoples discussing true ecn broker , I want to open a larger base account so how I can learn which broker is True ECN Broker?
If there any way to check true ecn broker then please mention key points.
Thanks