Bid-ask is a term related to the order book. Bid, meaning the highest bid on the bid side, also known as the “top of the book” of bids. Ask is the term that defines the lowest price offer of the sale, therefore, it is the “top of the book” of the sale.
What is an ECN? Definition and Best Brokers
- 1 What is an ECN?
- 2 ECN advantages
- 3 How does an ECN work?
- 4 Major ECN markets
- 5 What is an ECN broker?
- 6 When should I use an ECN account?
- 7 Summary about ECN
- 8 ECN frequently asked questions
An ECN Electronic Communications Network (Electronic Communication Network) is a platform that directly connects buyers and sellers to facilitate Forex trading — the goal is to speed up execution and reduce costs. In this guide, we will explain what an ECN is and how an ECN broker works.
We'll also look at the pros and cons of trading on an ECN and when you should use one, so you have all the knowledge you need to make the right decision for your trading strategy!
What is an ECN?
An ECN, or electronic communication network, is technology that automatically connects buyers and sellers in a securities market. The computerized system combines buy orders with sell orders so that investors can execute transactions quickly and conveniently.
Another way of looking at this is that an ECN system looks for the best bid/ask quotes, then connects them to complete the trade — no middleman.
Electronic communications networks are required to register as brokers under the SEC. As they can connect individual traders with top brokers, they must follow all applicable rules and regulations.
ECNs are considered an alternative trading system because they do not use market makers from an exchange or over-the-counter market.
This means that orders can be partially or fully executed, which can be convenient for negociação after office hours. Likewise, most orders sent on an ECN are limit orders.
How does an ECN work?
To understand how an electronic communication network operates, there are a few things to consider: the technology behind ECN, its fee structure, and how trades are executed.
Technology behind ECN
Before we get into fees and how trades are executed, we should first review the technology that drives ECNs.
These computer-based systems show investors the best bid—ask—quote from various market participants. Then they will automatically combine and execute the trades.
To do this accurately, the ECN must use an aggregation system that connects traders, brokers and liquidity providers.
This must be done without the intervention of a third party such as a dealing desk, so the software needs to quickly review orders and connect them.
ECN Fee Structure
Next, you must understand the ECN fee structure. These platforms apply fees per trade — most often using fractions of a cent. ECNs are not market makers, but charge a fee to match buyers and sellers who wish to transact on their networks.
Electronic communications networks have a flat fee structure. While this means you can save money when compared to traditional brokers, it also means you can spend more — it all depends on the trading.
You will be charged the service fee whether you profit from the trade or not, so you should be careful when trading on low margins.
It is important to note that the fee structure may change based on market liquidity and timing of trades. As such, you should calculate the fees or commissions to ensure that you are not cutting into your profits.
Executing Transactions on an ECN
Trades are automatically executed on an ECN. When the buyer and seller with the best quotes match, the deal is processed.
An ECN broker is not a dealing desk, so they do not pass the order flow to market makers — instead, they match trading participants and move the transaction to liquidity providers.
Transactions can be entered 24 hours a day as everything is computer based. By logging into the ECN system, you can see the best bid quote — ask immediately — and orders will be automatically matched and executed.
Major ECN markets
ECN technology is mainly used in the market Forex . However, you can also find electronic communications networks in the stock market.
ECN on the Forex market
Forex trading involves buying and selling currency pairs such as EUR/USD. This pair reflects the value of the Euro against the US Dollar. Transactions in the forex market are not carried out on a standard exchange such as the NYSE.
Instead, they are processed over the counter, which requires buyers and sellers to be directly connected. That's why ECNs are required to get involved in Forex trading.
ECN on the stock market
There are also ECNs on the stock market, although they are not the default option. For example, NASDAQ is an ECN that connects traders electronically through a network.
What is an ECN broker?
The term ECN broker refers to the financial intermediary that relies on an electronic communication network to provide clients with access to foreign exchange and equity markets. They are popular on Forex as you cannot trade currency pairs on a traditional exchange.
Although the ECN broker charges a fixed commission for each transaction they execute, they cannot take a position opposite to investors. This leads to lower spreads because they can consolidate price quotes from multiple market participants.
ECN account vs standard account
An ECN account is very different from a standard trading account. While standard brokers can trade against their clients to get bigger payouts, ECN cannot.
The electronic communication network simply connects buyers and sellers to increase liquidity — they do not set prices or transmit positions to market makers, so they cannot bet against their users.
When you trade on a standard account, a market maker will set price quotes and take them to the exchange. A market maker might pass your opposite trade to itself, which can increase liquidity — but it can also work against you.
A direct processing account, or STP, is also an automated broker like an ECN that bypasses the middleman. However, they only work with selected liquidity providers, which may limit their exposure to the market.
With an ECN, you have complete control over your trading — and your profit depends solely on your success with your investment strategy.
Forex account comparison
|execution speed||The fastest||Fast||Fast|
|best fit||advanced traders||Beginners||Beginners|
When should I use an ECN account?
You might be wondering, when should you use an ECN account?
This account is appropriate when you engage in Forex trading and want access to fast execution, low fees and better privacy.
ECN brokers cannot take the other side of your trading position and make a commission independently, so you must first understand their cost structure.
Best ECN Brokers
- Many Educational Materials
- Demo Account with $100.000
- Welcome Bonus
Up to 120%
- Segregated client funds
- Negative balance protection
- Member of the Financial Committee
- Negative balance protection
- Investor Compensation Fund
- Powerful and easy-to-use trading platforms
- Good selection of trading instruments
- Various account types and funding options
- tight margins
- Excellent market analysis
- Lots of educational material
- Large selection of trading instruments
- Multiple Regulations
- Various International Awards
- Regulation Broker With Good Reputation
- Copy Trading
- Allowed Hedging in Trading
Summary about ECN
An electronic communication network — or ECN for short — is an online system that automatically connects sellers and buyers of securities.
It looks for the best bid-ask quotes listed on the exchange and then matches them instantly, increasing execution speed and providing lower spreads.
ECNs allow you to trade after standard market hours and engage in forex trading. They also help you avoid competing with a broker and eliminate conflicts of interest, so they're a great way to maximize your returns in the market.
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