Trading Forex Currency through ECNs

Trading forex currency through ECNs (Electronic Communication Networks) is one of the two ways to trade forex market; other way is through market makers. When forex trades are done through ECNs, they tend to offer better (tight) spreads. They can offer so as their counter parties include different market makers, banks, and other traders. ECNs show best ask and bid prices derived from these different sources.

Like market makers, ECNs also act as counter parties for forex trades. But rather than trading against us, they match our orders against others’ to execute a trade; i.e., they operate on settlement basis rather than pricing basis. ECNs offer varying forex spreads, which can considerably differ with currency pair trading and market liquidity. They tend to offer very low (some times no) spreads for liquid currency pairs when market is less volatile. Unlike market makers, forex trading through ECNs include fixed commissions, usually on per trade basis. ECNs can be institutional ECNs, who offer services to institutional traders and retail ECNs, who offer services to retail traders.

Advantages of forex currency trading through ECNs include 1) better ask and bid prices than market makers, 2) low spreads on liquid currency pairs and 3) reduced chance of price manipulation as ECNs are not trading against traders. Disadvantages of forex market trading through ECNs include 1) often less trader-friendly forex trading platforms, 2) varying spreads making stop-loss setting difficult, 3) commissions involved for each transaction, and 4) lack of integrated charting and news feeds in many trading systems.

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