Why is ecn forex better than a broker with a dealing desk?
By: Amit Achameesing
Submitted: 2010-12-18 17:17:49 | Word Count: 600
One of the concepts which is not very often addressed but very important to understand is ecn forex.ECN means Electronic Communications Network.Ecn forex brokers provide a gateway to multiple liquidity providers feeding their prices via a trading platform to traders around the world. Before digging into the nitty gritty of ecn forex it is important to understand the mechanism of a dealing desk.
You will find a large number of brokers who are market makers and they are essentially the ones who have the possibility to trade against you. This means that if you make it big and win a few thousand dollars they are the ones who will lose the most . This also implies that there is the risk they intentionally manipulate prices to steal your money. 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.Given that these market makers also make their profits through the spreads from the bid/ask prices, these spreads tend to be relatively less competitive.
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In contrast ecn forex brokers offer very competitive spreads because they have access to multiple liquidity providers.Moreover with ecn forex there is no counterparty risk because ecn forex brokers do not trade against you but through its network pass on your order to the best possible match .
Thus you have direct access to many other retail and institutional traders, and the trades are done in the name of your ECN broker. As an example a retail trader trading through an ecn forex broker might have his buy order filled by "Bank 1", but close this same order with "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.
.
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 . Put simply the most competitive prices are always posted to the retail trader.Ecn forex is definitely more advantageous than brokers who have a dealing desk. It does not only give more security but also offers very competitive spreads to the small forex retail traders
Author Resource:-
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.
