Why is ecn forex better than a broker with a dealing desk?

One of the concepts which is not very often addressed but very important to understand is ecn forex.ECN means Electronic Communications Network.An ecn forex broker does not have a dealing desk but instead provides you with a marketplace where you connect to a worldwide exchange of banks and other financial institutions, and directly make the best deals. Before getting into the core of ecn forex it is appropriate to know what a broker with a dealing desk means?.

You have a large number of online brokers called market makers. These market makers are the ones who trade against your positions. What this means is that there is conflict of interest because if you lose they win. Therefore it would pay for them that you blow up your trading account. This also means that the risk of hitting your stop loss very quickly and always failing to reach your profit target is greatly increased. As their name suggests they are market makers who "make the market" and as such knows precisely where is your stop loss. In this way they can manipulate the market prices and stop you out all the time.This gets worst because these market makers also make their profits from the forex spread. And obviously this will tend to be wider allowing them to make higher profits.

In contrast ecn forex brokers offer very competitive spreads because they have access to multiple liquidity providers.More importantly ecn forex brokers only take the volume of orders and channel it to the best possible match elsewhere in the world. They do not trade against you and so there is no conflict interest.

Thus you are trading through your ecn broker who is in constant contact with other institutional traders. A client trader might have their buy order filled by liquidity provider "Bank 1", and close the same order against liquidity provider "Bank 2". As it happens, the best bid and ask is always displayed to the trader. Let us take a look at an example:


Assume there are two banks Bank 1 and Bank 2.

And in this example Bank 1 buys (bid) at 1.3521 but sells (ask) at 1.3523. Bank 2 buys (bid) at 1.3522 and sells (ask) at 1.3524.

This is shown as follows:

Bank 1 1.3521 1.3523

Bank 2 1.3522 1.3524

From here the best bid and ask prices for the tightest spread is displayed to the retail forex trader and is as follows:

Client price: 1.3522 1.3523 (1 pip spread)


Forex Trader 1 buys at the best ask price from Bank 1 at 1.3523 instead of 1.3524 from Bank 2.

And Forex Trader 2 sells at the best bid price of 1.3522 to Bank 2 instead of 1.3521 to Bank 1.

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With the above example you can conceive that prices from a variety of instutional investors feed into an aggregation engine which then chooses the best buy and sell prices to display on the trading platform . The best selected prices are posted to clients.This is how ecn forex brokers give you some crucial advantages over market makers who have a dealing desk.Thus choosing an ecn forex broker at the outset greatly tilt the odds in your favor



Learn about ecn forex and other key concepts you need to be aware of when choosing forex brokers.These concepts are explained by forex expert Amit Achameesing.