2.8 Electronic Communications Network (ECN) Brokers

 

ECN stands for Electronic Communication Network. As the name suggests, these are electronic networks which a trading entity can use to connect and trade other market participants. These market participants can be retail traders, interbank market & liquidity providers as well as other ECN brokers. An ECN broker ensures your privacy and does not identify you. Only the data regarding the quotes and volumes is shown.

 

These brokers pass clients' orders into the main market and allow them to interact directly with other participants like banks, hedge funds, financial institutions, market makers and individual traders who are trading against each other by sending competing bids and offers into the system. Participants therefore trade in the true market and get the best prices, as prevailing, on their orders which are matched with counterparties in real time. 

 

An ECN broker does not get involved in the trading in any way. This way they can be can be transparent enough to show the trading positions or the quoted prices (ask or bid prices) with the size of the orders. This characteristic feature of a genuine ECN broker enables the clients to see the Depth of the Market (DOM). This is displayed in a data window (example shown below). With an ECN broker the traders can assess the liquidity in the market and trade accordingly.

 

Quotes and Depth of Market data shown by ECN brokers.

 

Even if an ECN broker does not filter out the best prices and just connects the different market players with transparency, the trade execution is automatic and without any re-quotes. Hence the execution is again a straight Through processing. Hence an ECN broker is in reality an ECN+STP broker

 

How Does an ECN Broker Make Money?

 

An ECN broker provides you the facility to connect with other market participants. The broker remains an independent entity. Because of this nature of the business an ECN brokers usually charge commissions on trades.  A true ECN networks, there is no dealing desk or price manipulation by any middle agent. However in certain cases an ECN may offer variable spreads to earn through those.

 

 
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