In the foreign exchange market, a broker holds an important role in providing access for the market's participants in trading. As it is rather inconvenient for traders to perform retail Forex individually, brokers exists as to bridge transactions between buyers and sellers. Basically, there are two major types of broker: the market makers and ECN brokers. Both types allow the smaller-scaled individual Forex traders penetrate the large interbank market, the center for trading activities.
Commonly, market makers provide a greater opportunity for participants to open accounts with a small starts; therefore, this option is very suitable for small transaction activities or beginner participants. ECN stands for Electronic Communications Network, and is an alternative to Forex brokers by also facilitating foreign exchange trading to participants. Basically, ECN brokerage is managed by computer softwares, and they work in different ways from market makers. While market makers become your opposite in trading and have the rights to maintain the position as fully or partially engaged with foreign exchange traders, ECN broker operates differently. Instead of taking side with a certain trader, it offers a platform for buyers, sellers, banks, and market makers to perform transactions.
As ECN brokers facilitate multiple participants in the foreign exchange market, it naturally opens the opportunity for larger trading activities. One of the uniqueness of ECN's operations is that it provides better privacy for its clients. Unlike individual traders who perform transactions under their own names, clients who use the service of ECN brokers as foreign exchange trading providers can maintain their anonymity. Instead of using a trader's account, the transaction runs under the name of the electronic broker. This is an excellent strategy for buyers or sellers who want to protect the confidentiality of their transaction.
ECN brokers have a flexible approach in the trading spread. While conventional market marks would typically set a fixed spread, participants in an ECN trading model can determine their own limit for the traded currency pair. Within the ECN platform, buyers or sellers have the opportunity to set their own limits and spreads autonomously. The platform gives complete access to participants to set their own limits and order without any restrictions. Alternately, you can also be your own market maker with an ECN broker as your transaction provider. Whichever limits and spreads you choose, the broker will find other participants who bids match with yours. With this method, there is little to no chance for market makers to manipulate the spreads offered to traders. The transaction will run within the real condition of the market's supply and demand chain.
When placing orders within ECN platforms, you will be able to clearly check quotes offered at the current time which best match your bids or offer. Additionally, clients can also check the all prices available in the platform along with each of their quantities. This is an advantage for clients as the feature allows the liquidity measurement of different prices in advance, which would greatly help you plan your orders. The ECN model of foreign exchange transaction is also suitable for Forex scalpers. Constant and frequent price changes in the system increase price volatility, which is an advantage for short-term traders and scalpers.
However, apart from the numerous advantages ECN brokers have to offer, there are drawbacks in trading Forex through this system. First and foremost, the ECN is not suitable for small traders or investors. As you will need to set your order limitation and restriction on your own, you will need quite a large capital in order to take part in the market.
While the system's transaction anonymity can be a benefit, it can turn into a disadvantage as well. As each trader can act as his own market maker, shady participants may use the opportunity to influence the market by offering trades in huge volumes and hiding behind anonymity.
To avoid frauds in foreign exchange trading, a participant should be careful. As you will entrust your money to the broker, you need to make sure that you choose the right provider. Apart from the promising offers a Forex ECN broker may provide, there are also additional things to consider. For instance, you can search online for the company's profile and achievements to know the reputation of one foreign exchange trading company. Joining a Forex forum and asking around is one of the most common methods in finding trusted brokers based on opinions from foreign exchange traders and investors.