Before you proceed looking for the best ECN forex broker, you should know what forex is. Forex, FX or the foreign exchange market is a market that is prevalent worldwide that is not bound by rules and limitations. Trading in this type of market does not involve any actual physical contact between and among participants. Foreign exchange market transactions are usually done OTC or over the counter between sellers and buyers who agree.
It does not matter where they are or who they are. For as long as they agree on the prices, they can proceed with trading. The market is not centralized – meaning, there is no such thing as the heart of marketplace. There are several brokers and there are millions of brokers playing on their own rules – meaning, a particular pair of currencies can bear different exchange rates. And that is where the competition comes in.
Given this nature of the foreign exchange market, you can rely on the market makers and the best ECN forex broker. The largest banking institutions in the world are considered the main players in the forex market. Most trading activities are facilitated by these banks and they have a network of connections that makes interbank marketing and trading possible.
These possibilities gave rise to the existence of the following types of brokers: market makers and ECNs or electronic communications networks. In this discussion, the focus will be on ECN and the process of finding the best ECN forex broker.
So, the next question is: How do these ECNs work? The prices are passed on by ECNs for various participants in the market. The participants include market makers and banks as well as the thousands or millions of traders. ECN brokers usually act as the counter parties in any forex transaction. They do not operate on pricing basis.
The best ECN forex broker actually relies on settlement operations. The currency pair spreads in ECN are varied for ECNs unlike in the case of market makers wherein the spreads are usually fixed. During active periods of trading, a trader can expect a scenario wherein no currency pair spreads will be available. This scenario is common in very dynamic pairs of major currencies and other crosses like: USD/CHF, EUR/USD, GBP/USD, and USD/JPY.
How does the best ECN forex broker make money in such operations? They charge their customers with a fixed fee or commission per transaction completed. The authentic ECNs do not involve itself in activities like the setting or making of prices. The retail traders are the only entities that can control or manipulate the prices.
There are two main types of electronic communication network foreign exchange brokers: the retail ECN and the institutional ECN. Retails ECNs provide quotes or estimates from few traders and banks on the network to the retail traders. On the other hand, institutional ECNs communicate the best (lowest) bid or ask from several market makers and institutions like banks and other financing establishments like big corporations and hedge funds.
In choosing the best ECN forex broker, you should know the basic functions of ECN. With these information, you are ready to do the choosing.