The foreign currency exchange market is a huge market where transactions are dealt over the counter between agreeing buyers and sellers from all corners of the world. Because of the decentralized nature of this market (as opposed to the centralized stock market where trading happens in one centralized exchange), the price of any particular currency pair at any given time may vary between brokers.
In the forex world, majority of the trading activities happen in the interbank market which is comprised of the main market players – the large world banks. But this does not mean small individual traders cannot penetrate the forex market. Although they are not allowed to enter the interbank market as they may not have credit relations with the big boys, they can trade in forex through one of two broker types – the market makers, and electronic communication networks (ECNs). Getting the services of the best ECN forex broker is therefore to your advantage.
Currency prices from different market players are available from ECNs including those from banks, market makers, and other traders that have links to the ECN. Based on these prices, they offer the most competitive ask/bid quotes on their trading platforms. In addition, the best ECN forex brokers act as counterparts to foreign currency transactions. They, however, do not work on the pricing base but on an agreement.
As opposed to the fixed spreads that some market makers suggest, the spreads vary on ECNs depending on the trading activity of the currency pairs. ECN forex traders may at times show no spread at all. This is particularly true in currency pairs that are very liquid such as the major pairs like the USD/JPY, USD/CHF, EUR/USD, and GBP/USD, and a fewselect cross currency pairs.
A true ECN does not have an impact in price determination. Thus, for individual traders, exposure to the risk of price manipulation is minimized. Following are the pros and cons of ECNs:
Pros
Potentially, currency prices are more volatile. This is especially advantageous for purposes of scalping.
A real ECN broker will not trade against foreign exchange traders because they simply forward their orders to banks or other traders at the opposing side of the transactions.
In general, forex traders stand to get better bid/ask quotes as they are culled from various sources.
Cons
Forex traders are under obligation to give commissions for every transaction.
In most cases, trading platforms of even the best ECN forex brokers are less user-friendly.
Calculating stops in advance are likely to be more difficult and complicated because of the use of variable bid/ask price spreads.
Overall, a forex trader’s decision on whether to get the services of an ECN forex broker or not can be based on the merits as well as the downsides of this type of broker as previously discussed. It is, however, worth mentioning that it is crucial to choose an ECN forex broker that one will be very comfortable with in order to be an effective trader.
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