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Introduction to ECN Forex Trading
ECN is an acronym which stands for Electronic Communication Network. It’s a famous phrase used in the forex trading industry. A forex ECN is a venue for electronically trading forex. A forex ECN is very similar to an exchange, like a stock exchange or crypto exchange. An ECN isn’t a broker; it’s a trading platform.
Forex brokers, banks, hedge funds and professional high net worth traders are likely to be users of a forex ECN. Typically forex ECNs are more cost-effective than trading with a prime broker that is a market maker or broker-dealer.
An excellent analogy highlighting the difference between an ECN and a broker is the ECN as a fruit market and the prime broker as a supermarket. In a supermarket, there is one supplier and no competition for the customer to buy from cheaper providers. However, an ECN is like a fruit market with many parties, all selling the same product. It’s the competitive environment that pushes the price down.
Your forex broker might choose to get liquidity from an ECN instead of using a prime broker. A broker is motivated to buy and sell at a profit. An ECN is full of members with different trading strategies and needs.
Professional Forex ECN Trading Platforms
As mentioned before, ECNs are venues like exchanges. Members of the ECN all trade with each other. The ECN platform provider changes a commission for facilitating the deal. Because there are so many members in one place, the pricing becomes competitive, and spreads are very tight. There are several ECN trading venues, and most, if not all, are only accepting professional clients, such as brokers, banks and professional trading firms.
Popular ECNs are LMAX, TrueFX and FXSpotstream. If you are a retail client, it’s unlikely that you will be able to open an account and trade directly with any of these ECNs.
Retail Forex ECN Trading Platforms
There are many trading platforms advertised as ECN trading platforms. The cTrader platform, for example, when it launched, was first branded as a retail forex ECN trading platform. What is confusing is that cTrader does not internally match order. Therefore cTrader is not an exchange or a trading venue. What this meant was cTrader had the technical ability to connect directly to an ECN. This functionality allowed brokers to send their clients orders to an ECN via FIX API. At the time, this possibility was revolutionary.
In recent years, the term ECN has turned into marketing jargon. If you see a forex broker or an account type marketed as being “ECN” it most likely means that the trading account has a tight spread and charges a commission, just like ECNs do.
While cTrader can connect directly to an ECN, MetaTrader 4 cannot, despite commonly being advertised as offering access to ECN trading. Brokers have manipulated the phrase and buried its true meaning.