What does ECN Stand for in Forex Trading?
ECN stands for Electronic Communication Network.
What is an ECN broker?
An ECN broker is a Forex broker that uses an electronic communication network (ECN) to connect traders to liquidity providers. ECN brokers are intermediaries and don’t take trades themselves.
Every time a client places a trade with an ECN broker, it collects prices from the members of this network and presents the trader with the tightest spread it could find to fulfil the volume requirement. Because the liquidity providers in this network are competing for your trade, ECN brokers have very tight spreads which can approach 0 pips.
ECN Broker Fees & Commission
ECN brokers do not make any money from the spread. Instead, they will charge a commission, which is their fee for playing matchmaker and finding a counter-party to your trade. Traditional brokers (Market Makers) have wider spreads because they charge their fee in the spread.
Because ECN brokers only act as an intermediary for a trade, they do not make money when traders lose. In fact, the reverse is true. Over time, a successful trader pays more in commission to an ECN broker, so ECN brokers want their clients to be profitable.
Conflict of Interest
Traders may prefer to trade with ECN brokers because there is no conflict of interest between trader and broker. Most market maker brokers will trade against their clients in their role as the counter-party, which means the broker makes money when their clients lose. Since ECN brokers earn money from client trade volume on all instruments traded, ECN brokers make more money when traders profit.
Slippage and requotes
ECN Brokers have a higher risk of slippage and requotes. Because ECN brokers rely on external liquidity to match clients’ trades, they are not always posted instantly. This can be a problem at times of high volatility – usually after a large event or data release – or at times of low liquidity – such as when most of the markets are closed. This also means that the market can move past your stop-loss orders, and your losses may exceed your expectations.
ECN Minimum Deposits
The last thing to be aware of with ECN brokers is that they generally require a larger minimum deposit – setting up and maintaining an ECN brokerage is an expensive business and traders will be charged more as a result. ECN Brokers require higher minimum deposits.
Which is the Best ECN Broker?
IC Markets is the best ECN broker. With some of the lowest trading costs in the industry, 20+ liquidity providers, all three major trading platforms, and fast market execution IC Markets won our award for Best Forex ECN broker 2021.
Other highlights include 24/7 customer service, various copy-trading services, and a VPS service. IC Markets combines leading ECN trading conditions with world-class regulatory oversight. Read our full IC Markets review here.
All FCA Brokers with ECN Trading Accounts
Here is our list of all reviewed FCA-regulated brokers with ECN trading accounts sorted by overall score.
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What is the difference between an ECN broker and a market maker?
With an ECN broker, the counterparty to your trade will be a liquidity provider from the broker’s network. With a market maker broker, the broker themselves will counter-party your trade. Market Makers create an artificial market for their clients – hence the name.
Market Makers are also known as dealing desk brokers, as all trades will be filled at the rates set by the broker’s internal dealing desk. This business model, which means a market maker will always profit from their clients’ losses, generates an inherent conflict of interest that many traders are cautious of.
Currently, most well-regulated market makers are well regarded in the industry, despite the conflict of interest, and they go to great lengths to ensure their clients are not being unfairly treated. These would be brokers like IG Markets, FxPro, AvaTrade, XM and eToro.
But, Market Maker brokers are not a common choice for experienced Forex traders. Traders are limited to trading with one counter-party who is always trading against you and never on the open market with dynamic spreads.
However, if you do want instant execution of your trades and you don’t want to pay a commission, a trusted market maker is a good idea.
How to Identify an ECN Broker?
There are a few ways to check: ECN brokers will describe their execution model in their legal documents, ECN brokers will always have variable spreads, ECN brokers will not have any trading restrictions (trade size, stop-loss limits, scalping or hedging bans), and traders with an ECN broker will experience both negative and positive slippage.
Read the Broker Agreement
All regulated brokers are required by law to publish a Client Agreement and Order Execution Policy stipulating their execution methods. Some ECN brokers will also act as Market Maker in certain circumstances, so this is not always a foolproof method of determining a broker type. See below for an extract from Pepperstone’s execution policy showing that they are an ECN broker.
Check that Spreads are Variable
ECN’s offer tight spreads and charge a commission per trade, and the spreads will also be variable. Fixed spreads are only offered by Market Makers, as they are not taken from a live and dynamic market. Below you can see that Axi publishes its live spreads on its website, these are variable and are taken from their network of liquidity providers.
Look for Trading Restrictions
ECN brokers will never restrict your trading methods or trade size. This means that all automated trading, scalping, hedging and large order sizes (anything of 5 lots or over) will all be allowed. If a broker restricts any of these then it is not an ECN broker.
A good example of a broker with these restrictions is Plus500, a well-known market maker:
Slippage will be Positive and Negative
Slippage is the difference between the execution price and the order price at the time the order is submitted for execution. Slippage is a normal aspect of trading with ECN brokers, particularly for orders of a larger size and during times of thin liquidity and/or volatile market conditions.
Slippage can both positively and negatively impact your trading position. If you find that you are only experiencing negative slippage, then your broker is not using an ECN execution method. Another well known ECN broker is FxPro, which is dedicated to full transparency and always publishes its slippage statistics, see below for its 2019 figures:
Summary
So, while ECN brokers do not have the inherent conflict of interest present with market makers, a commission will always be charged on your trades. ECN accounts will also require a higher minimum deposit – putting them out of reach for many beginner traders.
Are ECN brokers objectively better than market makers? This is not necessarily the case. All brokers we work with are trustworthy and well-regulated and broker choice is always down to personal preference. Whether you go with an ECN broker or a market maker, if you choose one from our list of the best in South Africa you will be in good hands.
FAQs
What is the difference between an ECN Account and a Standard Account?
ECN Accounts will have tighter spreads than a Standard Account, but you will have to pay a commission per trade. Standard Accounts will not have any commission, but spreads will be wider.
How do ECN Brokers Make Money?
ECN Brokers make money by charging traders a commission per trade. Because they pass pricing on directly from their liquidity providers, they do not charge a fee in the spread.
Which is better, ECN Brokers or ECN/STP Brokers?
ECN/STP brokers are better because they will have less slippage and a faster execution speed than a pure ECN broker.
STP (Straight Through Processing) is the method of the transaction – with STP your order is sent directly to the counterparty through the Financial Information Exchange (FIX) protocol. The FIX protocol decreases trade execution time, reduces slippage, and ensures that traders get the best available pricing.
The STP protocol can be used by market-maker brokers as well as ECN brokers, and some brokers use a hybrid formula, where they will sometimes be the counterparty, and other times use an external liquidity provider. While this does lead to less slippage, it does mean that some trades will have a conflict of interest.
In most cases choosing a hybrid broker is the best way to go, as they will give you the most options.
Forex Risk Disclaimer
Trading Forex and CFDs is not suitable for all investors as it carries a high degree of risk to your capital: 75-90% of retail investors lose money trading these products.
Forex and CFD transactions involve high risk due to the following factors: Over-leveraging, unpredictable market volatility, slippage arising from a lack of liquidity, inadequate trading knowledge or experience, and a lack of regulatory protection for clients.
Traders should not deposit any money that is not disposable. Regardless of how much research you have done, or how confident you are in your trade, there is always a substantial risk of loss. (Learn more from the FCA or from ASIC)
Our Methodology
Our State of the Market Report and Broker Directory are the results of extensive research on over 180 Forex brokers. The explicit goal of these resources is to help traders find the best Forex brokers – and steer them away from the worst ones – with the benefit of accurate and up-to-date information.
With over 200 data points on each broker and over 3000 hours of research and review writing, we believe we have succeeded in our goal.
In a world where trading conditions and customer support can vary based on where you live, our broker reviews focus on the local trader and give you information about these brokers from your perspective.
All research has been conducted by our in-house team of researchers and writers, gathering information from various company representatives, websites and sifting through the fine print. Learn more about how we rank brokers.
Accepts UK Clients. Average spread EUR/USD 0.60 pips with 0.0 USD commission round turn on the trading account with lowest minimum deposit. Max leverage 30:1. Islamic account available. MT4, MT5 & cTrader platforms supported. Pepperstone is regulated by the FCA, ASIC, and the DFSA. 75.8% of traders lose money with this provider.
