In recent years, many forex brokers have opened their doors as ECN brokers. ECN, as we have seen, means “electronic communication network” and sometimes brokers of this type are also known as “STP brokers” (STP means “direct processing”) or NDD brokers (No Dealing Desk or No Operations Desk). All these terms mean more or less the same: the operations of the clients are executed matching them with those of other clients or other counterparts that wish to occupy the other side of the operation. Non-ECN brokers, on the other hand, assume the other side of the operation themselves, creating a clear and clear conflict of interest with their clients. In general, they are known as Market Makers or Brokers With Operations Table (DD).
ECN forex brokers usually charge lower spreads than market makers, which compensate at least partially by charging additional commissions for market entries and exits and which are calculated as a fixed percentage of the total value of the transaction. Despite these commissions, the combination of the spread and the commission is generally at least a little lower than the spread charged by a similar position with the Non-ECN Brokers.
It is this combination of lack of conflict of interest along with the typical low trading cost that makes ECN brokers so attractive to traders, but there are other factors to consider before deciding that an ECN broker or an ECN account ( some brokers offer ECN and DD accounts equally).
Account size – ECN brokers usually require larger minimum deposits. Some insist on requiring minimum position sizes as high as 1 mini lot instead of 1 micro lot (one tenth of a mini lot), even though the micro lot has become the standard of the Forex industry.
Execution – ECN forex brokers usually offer excellent execution speed and sometimes the spreads are even non-existent or inverted for a second or two. Keep in mind that, during periods of very low liquidity, execution can be seriously delayed since there is no market maker to take over the operation if no client wants it. This can lead to very negative slip events or to see us trapped in a bad position longer than we would be if we negotiated with a market creator broker. These events often tend to occur in the publication of economic data and important news, especially when the result of the data differs from market expectations.
Spreads – are usually an attractive feature, even when considering the commission. However, spreads can be drastically expanded and can sometimes be higher than those offered by market-based brokers at the same time. Of course, the spreads vary a lot, since they are based more precisely on the supply and demand of the market. Fixed spreads are only available through market-creating brokers. They are rarely worth financially, as is often the case, but that is another story.
Instrument Selection – as ECN brokers need to make sure that they are really connected to the liquidity of a market before they can credibly offer trading instruments, market-creating brokers are usually better placed to offer a wider variety of instruments. instruments, stocks, raw materials and various types of indexes. In addition, ECN forex brokers tend to require larger minimum position sizes in this type of non-forex instruments. This means that, if you want to be very diversified, you may have another reason to consider using a market creator broker, in addition to or as an alternative to an ECN broker.
Maximum Size by Position – ECN brokers usually offer much higher maximum position sizes, since (at least theoretically) they do not have to worry about processing any order through a negotiation table (Dealing Desk, DD). For example, some brokers with a trading desk will not allow you to buy or sell more than 5 lots at a time. ECN brokers, if they specify maximum sizes per position, tend to establish them at much higher levels.
Minimum Size by Position – ECN brokers typically used to require minimum minimum position sizes, from 1 mini lot (0.1 full lots), compared to a 1 micro lot (0.01 full lots), which is what is normally they require brokers with a negotiating table. Although a growing number of ECN brokers now allow you to negotiate micro lots, some still do not allow it, which could be a problem if you prefer trading with micro lots.