ECN technology takes order execution to another level, as traders’ orders are entered into interbank accounts and executed almost immediately. There are also other differences from a regular account that have a significant impact on the trading results. Let’s look at the basic tips for trading on ECN accounts.
What is an ECN account
An ECN is an electronic communication network, a special trading account through which trades are executed directly between market participants. The purpose of an ECN account is to reduce the number of intermediaries and to connect traders as quickly as possible. In a normal account, the broker himself binds the request to the ones that are available to him. ECN provides a huge network of applications not only from broker’s clients but also from other brokers, investment funds, banks and financial institutions. When you open a trade in an ECN account, you trade not only with the market-maker, but also with other market participants.
ECN account is an account, on which a broker offers a client’s position output to the interbank market. The concept of interbank market is somewhat relative as there is no single world marketplace where banks, large companies, investment funds and other market makers would trade. Large transactions between banks can take place outside of any systems.
But for Forex trading ECN technology implies a withdrawal of orders to a certain marketplace, which is connected to other trading participants, such as banks or investment funds. The orders of the broker’s clients are displayed on this platform and executed in fractions of a second, faster than on the regular accounts. ECN in simple words is an account in which transactions are opened immediately and without processing by the broker, working in a single order log.
How an ECN account works
ECN accounts were first introduced in 1999. The key feature of the technology is the exclusion of even theoretical conflict of interest between broker and trader.
- The broker does not execute the client’s order, instead it is transmitted to the interbank, i.e. access to interbank liquidity is organized.
- If an order to buy/sell was sent at the market price, a counterparty is found in a few milliseconds. It can be anyone – a bank, an investment fund or a large company. Due to the abundance of offers, the spread (the difference between the buy and sell is minimal and can be as low as 0 pips for major currency pairs). Because of this, brokers impose commissions on ECN accounts, the commissions provide the company’s earnings.
- As soon as the counterparty is found, the order is executed and information about it is recorded on the server of the broker. Closing of the position is carried out on the same principle.
At neither stage of the process can the broker influence the order execution. The broker’s role is just an intermediary – he receives the request, broadcasts it to the ECN-gateway and keeps the information on the client’s trade.