We have seen the reasons why ECN forex brokers are becoming more popular. We have observed that more and more brokers advertise themselves as ECN brokers, or at least offer ECN-type accounts. There is a lot of controversy surrounding the question of whether many of these brokers are “real” ECN brokers. So, what is a “real” ECN broker and how can you distinguish when you are telling the truth?
A true ECN broker is simply defined as a forex broker that connects your orders in a network where they are automatically matched with the order of another customer or liquidity provider. This is the definition of a manual to work with. Probably, most brokers who claim to be ECN brokers are saying at least the truth about this, although if you see large spreads, spreads that never really seem to vary or a continually slow execution, they almost certainly are not.
The most sophisticated problem arises when we ask who is a “liquidity provider”. If it is just another negotiation table, how can a “true” ECN offer be? The network is only as good as its source. To be considered a true ECN broker, the liquidity provider must really be a level 1 bank. We must ask ourselves how many times that is really the case, and why many brokers that advertise themselves as ECN brokers are so tight on the suppliers of liquidity they use!
When the first ECN forex brokers began to appear, bank traders began to wonder how mini-lot orders (let alone micro-lot orders) could be sent directly to level 1 banks for processing. The bank traders will tell you that, at this level, the position sizes are generally at a minimum of ten full lots more or less. This suggests that, an ECN broker that offers smaller minimum position sizes, should inevitably perform a “bucketing” of orders and that would require a kind of negotiating table to process and assign the “bucketing”.
The final question is: does that really matter? If a broker at least is trying to match orders directly, there is not much conflict of interest, potential or other. If you benefit from a low cost of negotiation and a relatively quick execution, then why not be happy with what you have. Just do not fall for illusions as to what is probably happening behind the scenes.