What Is ECN Trading And What Are Its Advantages?
Gone are the days when large financial institutions used to rule the market. The technological developments have led to more retail investors in the forex market. The forex market allows traders to receive gains from currency fluctuations. The reason behind its popularity is its liquidity and the availability of numerous financial instruments. Technological innovation has given rise to some significant trading styles and methods. ECN trading is a popular trading method adopted by many forex traders across the globe.
What Is ECN Trading?
- ECN stands for Electronic Communication Network and is a popular trading form implemented by multiple traders.
- Generally, it refers to a systematic method that intuitively matches the buy and sell orders for different financial securities in the forex market.
- When the traders adopt ECN trading, the need for a middleman or an intermediator automatically gets mitigated.
- It is best suitable for the traders who want to finalize the transaction securely while residing in another geographical location and don’t want third-party interference.
- Therefore, complete privacy and confidentiality are maintained for the traders.
The primary feature of ECN trading is that the traders can trade even at odd hours, and therefore no time constraint arises during the transactions.
So now let’s get into the Best ECN Brokers,
Key Features Of ECN Trading
Here are some core features of ECN trading that make it super popular among traders and potential traders.
- Builds Link: ECN trading builds a clear and transparent link between significant brokers and traders. Besides, the connection is established without any middleman. Therefore, the parties maintain better communication and transparent transactions.
- Geographic Locations: The general benefit of trading through ECN is eliminating geographical boundaries. Hence, the traders can securely perform the transaction without worrying about domestic and other geographical factors.
- Registration: The SEC ensures that the trading occurs securely and without fraud. Therefore, the SEC accounts for ECNs to register themselves as brokers-dealers.
- Computerized: ECN trading is heavily computer-based. The system automatically executes the order once it detects the ask and bid price from several market participants.
- After-Hours: The ECN trading mitigates the time constraint, and the transactions can be performed at any hour of the day. With ECN trading, the traders can also transact or perform different forex activities even during odd hours.
- Instant Order Execution: In comparison to other trading methods, ECNs account for high speed and therefore, the orders get instantly executed.
The Securities and Exchange Commission, called SEC, categorizes ECN trading as an excellent alternative trading method. Generally, money is made in ECN by charging every transaction that occurs. Hence, it maintains the financial obligation.
Also read: What Is Leverage And Margin Trading?
Furthermore, the role of a middleman is also eliminated as the orders are executed automatically. Sometimes part transactions are processed, and sometimes the entire transaction gets processed. Besides, generally, ECN trading consists of limit orders. The presence of limit orders ensures the safety and security of transactions as the market is highly volatile, and therefore the price may get affected.
Merits Of ECN Trading
Here are some excellent benefits derived from ECN trading:
- Say No To Conflict Of Interest: The ECN brokers never trade against their clients. Therefore, the traders are on the safe side as no bet will be placed against their securities. In other words, conflict of interest does not arise, and both the traders and brokers can work ideally.
- Limited Price Manipulation: The prices used in ECN trading are generally taken from other liquidity providers. Therefore, the ECN brokers cannot manipulate or change the price. Hence, complete transparency is maintained.
- Ideal For Flexible Traders: The traders who don’t remain actively involved in the market get the perfect opportunity to trade with ECN trading because it extends the time limit. Therefore the trading can be performed during any hour of the day.
- Reduced Commissions: The spreads are not widened in the ECN trading, and therefore, the overall traders pay fewer fees and commissions than the other trading methods.
- Anonymity: ECN trading also offers anonymity to specific traders who wish to transact in more significant amounts. Hence, the identity is not disclosed, and the traders get access to better and higher returns.
The Bottom Line
Therefore, in a nutshell, it is fitting to mention that ECN trading caters to the needs and demands of global traders. Thus, many people prefer it because the need for a middleman is removed significantly through ECN trading.