Electronic Communications Network is a network that connects all market participants.
The key difference between this account and the others is that the ECN broker does not interfere in the process of customers’ trading since the positions are displayed directly to liquidity providers. It helps to have an understanding of this before discussing ECN pricing.
In Forex, the ECN system is created from the applications of traders who are ready to buy/sell a specific currency pair at a particular price. Also, in the forex market, the trader can’t select an ECN account; instead, this is done by a broker.
What is ECN pricing?
Now that you have understood what an ECN is, it’s time to move to ECN pricing.
ECN pricing allows trading orders to be executed at super competitive pricing. Broker offering ECN connects traders with liquidity providers and can offer low spread and minimum slippage.
Features of ECN pricing
- The minimum deposit threshold is set by the broker. To trade on ECN, you need to deposit from $100- $200 (depending on the company).
- There are no restrictions on placing orders. You can trade even inside the spread.
- ECN trades are executed instantly, with no slippage. But during periods of peak activity in the market due to the exhaustion of liquidity at current price levels, there may be non-critical slippages. Therefore, scalping trading systems are recommended for use on this type of account.
- The spread is small, but not fixed, during peak volatility hours it decreases to zero.
- There is a transaction commission on ECN account.
- The broker does not interfere with the trading process.
- There isn’t any conflict of interest between the trader and the broker. At ECN, the broker’s earnings are a commission from a transaction.
Let’s dig deeper into how ECN pricing works.
Suppose you have an ECN account; you are going to open a long position on EURUSD with a volume of 3 lots. At the time of the transaction the exchange rate is 1.1600. The following scenarios are possible:
- At this price there is a required volume in the opposite direction, the application is immediately executed.
- In 1.1600 there is only 1 lot, the ECN system is looking for applications at other nearby prices. For example, a third-order is executed at 1.1600, another 0.5 lots at 1.1602, and the remainder at 1.1603. There is no difference for a trader, except that the transaction is completed at a less favorable price.
In the example above, the system would fulfill application at a price below 1.1600, depending on whether there is sufficient liquidity. At the same time, a decrease in volumes is observed in the order book at the price levels at which the trader’s order was executed.
Benefits of ECN pricing
- The openness of the transaction. All transactions are put on public display.
- Floating spread. A trader can enter a trade at any time by setting his order.
- High volatility. A floating spread will contribute to a sharp jump in quotes.
- Reliability. The leading world banks and corporations work with the ECN system, which makes ECN accounts a reliable way to trade Forex.