There are many types of brokers out there, with ECN brokers probably being the most popular ones. Through ECN systems, traders can make direct trades with each other and enjoy after-hours trading and tighter spreads.
Now, just like any brokerage model, ECNs have their pros and cons, and before settling for one, you must be aware of what you’re getting into. This article will explain everything about ECN brokers so you can make the right choice for trading.
What Are ECN Brokers?
An ECN broker is a company or person that can match buy and sell orders by taking advantage of electronic communications networks. This entity can create connections between traders and other stock and currency market participants. What makes ECNs stand out is the fact that they can help sellers and buyers connect directly. This is different from other networks which usually have market makers as intermediaries between the parties.
What Are the Benefits of ECNs?
ECN brokers come with a variety of advantages, and that’s why people choose them very frequently. When anyone wants to sell and buy stocks electronically, ECNs make things better. Here are some advantages of these brokers:
- Traders can use various price quotes using a centralized system with the best ask prices and bids in the whole market
- ECN brokers bring large-scale transactions and offer investors full anonymity
- They let liquidity providers join trade orders directly into the centralized database
- They offer transparent and lower trading costs and much stricter bid-ask
- ECNs have extra trading hours for investors
- The trade orders can stay open even after the closing of the currency and stock exchanges until the discovery of the best buy and sell matches
- Traders can receive help entering the equity and currency markets and match their trading desires with different ECN participants
- The transactions are processed fasters because ECNs are automated, without any intermediary being involved
What Are the Downsides of ECNs?
Unfortunately, ECNs have a few limitations, just like any other type of broker. Some of these downsides include:
- Leading to the price difference for the open market outside
- Fragmenting the market
- Putting buyers and sellers to insular trading risks by matching them according to their requirements
- ECN fees are not paid by lower-volume investors
- The minimum account trade sizes and values are higher
- Real ECN brokers tend to charge a fixed commission of much higher value for executing trades and taking advantage of the system
- They are not the best for higher-volume investors
What Makes an ECN Broker Different from a Dealing Desk Broker?
There are a few key differences between ECN brokers and dealing desk brokers.
For instance, ECNs can pass the trade orders to liquidity providers, and can electronically match trading participants. Furthermore, ECN brokers don’t pass on trade orders to the market maker, and they connect the sellers and buyers directly.
Meanwhile, dealing desk brokers will pass on orders to the market maker and will incur losses when a person wins a trade and vice-versa. It also goes opposite of the trade when performing trades.
ECN brokers are great in many ways, mainly because they match participants directly and electronically. But always make sure to compare the pros and cons before settling for an ECN broker.