How Does ECN Trading Work?

Choice of a broker is a matter of the utmost importance.

Online trading
Online trading.Photo by M. B. M. on Unsplash

Online trading is taking the African continent by the storm. Forex platforms present a viable earning tool for the local population. Anyone can profit from currency trades remotely — all they need is software and a registered account. These are provided by intermediaries known as brokers. The companies are classified as ECN or market makers based on their revenue source. The former is the purest form of brokerage. Here is why.

The foreign exchange is an over-the-counter market. This means buyers and sellers establish a direct connection through intermediaries. Individuals, banks and market traders all partake in the activity. If they act through an ECN broker, they take advantage of the tightest spreads. But why?

What is an ECN Broker?

Such brokerage firms use an Electronic Communications Network. As parties engage in buying and selling, bids and offers are registered by the system, and interaction occurs within it. Thanks to favourable spreads, traders can get the best offer at the right time. Top ECN trading brokers neither set the spreads nor control them. Their source of profit is commission. Hence, they are impartial and very unlikely to interfere.

1.   Neutral Pricing

A market maker brokerage sets its own prices. Meanwhile, their ECN counterpart lets the exchange define them independently. Here, value is determined by the market itself, with no opportunity for manipulation. Prices for currency pairs reflect the current state of the marketplace, which is why they are referred to as neutral. They may not be biased by any particular trader’s strategy.

2.   Immediate Trades

Forget about dealing desks and requotes. Here, everything is done in a flash. Cutting-edge platforms show prices in the live streaming mode. This ensures the best values and instant confirmation.

3.   Automated Data Flow

As a retail trader, you always have an opportunity to adjust your risk management approach and trading style following incoming data and the matching engine. This allows you to use the best Bid and Ask values.

4.   Variable Spreads

Since ECN brokers do not have the power to fixate their spreads, these are always variable. This means an ECN broker will never manipulate spreads to trade against their clients.

Are There Any Downsides?

Generally, the pros of using ECN brokers outweigh the cons. After all, they offer more reliable trading conditions overall. However, not all participants are happy about the fixed commission for each transaction. As the intermediary does not control the spreads, they need another source of profit — hence the fees.

Nevertheless, your costs are lower in comparison with market maker rates. They will also be way more transparent. When trading via market makers, pricing may be unfair, while spreads are definitely bigger. This is how these companies make money.

Secondly, you may find it challenging to define stops and targets. Prices are always in flux, along with spreads, and slippage is possible. This is what happens when your trade is executed at a price different from the one you requested. This may be observed in highly volatile markets, or periods when your order does not have a match at the specified price. Importantly, slippage can be positive — i.e., work in your favour.

Picking Best ECN Provider

Choice of a broker is a matter of the utmost importance. Today, currency trading is wildly popular around the world. The number of brokerage firms is growing along with the army of online traders (today, it has 15+ million members).

Not all brokers in Africa may be trusted. There are both home-grown and international brands operating in the region. Global firms like FXTM have a clear advantage, as they serve millions of clients worldwide. To succeed, make an informed decision based on a set of rigid criteria. Here is your checklist.

1.   Legal Status

The company must be officially licensed to do business in South Africa. Registration is essential, and reputable companies always specify these details on their websites. Global providers are also supervised by credible regulatory entities like the CySEC.

2.   No Fixed Spreads

A genuine broker will only offer variable or floating spreads.

3.   No Dealing Desk

Study the official website of your potential provider. Do you see any mention of a dealing desk? This is a red flag. You could also see if pips offered during news reports differ for demo and live accounts. A reliable ECN brokerage never allows this.

4.   No Negative Slippage

This is impossible for true ECN schemes.

Once you have ticked all the boxes, compare commissions and spreads. Look for a company with immediate and smooth trade execution. Sufficient liquidity and seamless practices will ensure your trades are executed instantly and at a fair price.

Practical Comparison

To feel the difference between the two brokerage schemes, you may open demo accounts with both. This way, you can test conditions in real-time, but with zero risks involved.


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