There is a lot of debate going on about market makers and ECN brokers. This article will discuss what an ECN broker is all about, as well as its advantages and disadvantages.
Knowing what an ECN is and how it is different from a market maker can be helpful in choosing a broker. It is important to know how these different kinds of brokers operate in order to figure out which would be best for your forex trading career.
What does ECN mean?
ECN stands for Electronic Communications Network. It refers to a computer system that facilitates forex trading outside of exchanges. They are also sometimes called Alternative Trading Systems or Alternative Trading Networks.
ECN brokers collate prices from various market participants on its network, such as banks, retail traders, and financial institutions. It displays the bid/ask prices from these market participants on its trading platform through the FIX (Financial Information Exchange) Protocol technology.
Market Makers vs. ECN
Unlike most market makers that offer fixed spreads, ECNs usually have variable spreads. This is because price-setting by ECNs depends on the behavior of the pair and the pricing of other market participants in the network.
Market makers usually take the opposite side of a client’s transaction while ECNs match orders with those of its other clients. They set the bid and ask prices by themselves and publish these on their trading platform. Market makers make money by taking the opposite side of a client’s trade and through a fixed bid/ask spread while ECNs charge a fixed commission cost per transaction.
With that, market makers present a conflict of interest that is not present when trading with ECN brokers. Pricing offered by ECNs reflect market conditions while market makers’ prices are often given to their advantage.
In addition, a larger risk of slippage is present for market makers, as they can widen the bid/ask spread during volatile trading sessions. They can even decide to freeze trading or make a particular currency pair unavailable to prevent traders from opening or closing positions with the pair. Pending orders might not get filled at the prices specified by the trader.
The similarity between the two though is that both market makers and ECN have retail and institutional arms. Retail market makers and ECNs are involved with transactions of retail traders while institutional market makers and ECNs comprise banks, large financial institutions and hedge funds.
Pros of ECN brokers
The main advantage of trading with an ECN broker is that you have access to better prices since these are based on those given by other traders and institutions. Although slippage can still take place during volatile trading environments, pricing by ECNs is usually considered as fair because it is generally determined by supply and demand.
In addition, ECN brokers are not trading against you since they simply match the orders with other clients. There is no conflict of interest between the broker and the client. As such, prices reflect real market conditions and the broker has no incentive to adjust bid/ask prices to their advantage. Forex ECN trading is completely anonymous, enabling traders to deal with neutral prices.
Prices on ECN platforms tend to be sensitive to volatility, which makes trading with ECN brokers ideal for scalping. Liquidity also tends to be better among ECN brokers, guaranteeing faster trade execution. During periods of high activity and liquidity, spreads on ECN brokers can be very narrow as the broker can easily match a client’s order to another.
Fixed commissions costs are charged by ECNs versus market makers that profit by varying the spreads. With that, transparency is better among ECN brokers because the transactions costs are already fully disclosed before the trade is executed. This is not the case for market makers which can manipulate the bid/ask spread in order to get higher profits.
Also, unlike market makers that can decide against executing a trade, ECNs are not trading against you as they are simply matching your orders with others taking the opposite side of the trade. As a result, they are not likely to manipulate prices or prevent you from executing your trade at your desired price.
Cons of ECN brokers
There is a fixed commission fee for every transaction since this is how ECN brokers make money. Still, this is usually cheaper and more transparent compared to the costs incurred with larger bid/ask spreads or unfair prices given by market makers.
Calculations of stops and targets may be challenging to do on ECN broker platforms as price keeps moving and because of the variable spreads. Slippage is still a possibility, especially during session overlaps, as various factors and clients are affecting price ticks all at the same time.
Choosing a Broker
At the end of the day, having a clear idea of which characteristics you prefer will be crucial in helping you decide what kind of broker you should open an account with. If you prefer fixed commission fees and tighter spreads, you might want to consider trading with an ECN broker. If you would rather have your broker take the opposite side of your trade, then go with a market maker.
Liquidity and trade execution are important factors to bear in mind when choosing a broker. It is ideal to open an account with a broker that can guarantee seamless and instantaneous order execution at a fair price.
Opening a demo account with an ECN and a market maker can help you decide which kind of broker you should trade with. First-hand experience of knowing how a particular broker operates and executes trades can give you a clearer idea of what will be better for your trade performance.
Before opening a live account with your broker of choice, make sure you go through the fine print and read the terms and conditions for managing a forex trading account. There are some details that vary from broker to broker and even among ECN brokers or market makers, so it’s necessary for you to know the important details.
World shares sink as bond yields, commodities surge
By Ritvik Carvalho
LONDON (Reuters) – World shares sank on Monday as expectations for faster economic growth and inflation battered bonds and boosted commodities, while rising real yields made equity valuations look more stretched in comparison.
MSCI’s All Country World Index, which tracks shares across 49 countries, was down 0.4% after the start of European trade.
The pan-European STOXX 600 index was down 1%, at its lowest in 10 days. Germany’s DAX, France’s CAC 40 and Spain’s IBEX 35 index fell 1% each, Britain’s FTSE 100 lost 0.85% and Italy’s FTSE MIB index fell 0.9%. [.EU]
S&P 500 futures fell to their lowest since Feb. 4, down 1% on the day. [.N]
Bonds have been bruised by the prospect of a stronger economic recovery and greater borrowing as President Joe Biden’s $1.9 trillion stimulus package progresses.
Federal Reserve Chair Jerome Powell delivers his semi-annual testimony before Congress this week and is likely to reiterate a commitment to keeping policy super easy for as long as needed to drive inflation higher.
“The coming week is relatively thin on the international data agenda, but after the recent rise in long bond yields, Fed Chairman Powell’s hearings in both chambers of Congress (Tuesday / Wednesday) will be attracting great interest,” said Elisabet Kopelman, U.S. economist at SEB.
“The fact that the most recent rise in long bond yields has been driven by higher real interest rates and not just inflation expectations increases the probability of a dovish message.”
European Central Bank President Christine Lagarde is also expected to sound dovish in a speech later Monday.
Yields on 10-year Treasury notes have already reached 1.38%, breaking the psychological 1.30% level and bringing the rise for the year so far to a steep 43 basis points.
Analysts at BofA noted 30-year bonds had returned -9.4% in the year to date, the worst start since 2013.
“Real assets are outperforming financial assets big in ’21 as cyclical, political, secular trends say higher inflation,” the analysts said in a note. “Surging commodities, energy laggards in vogue, materials in secular breakouts.”
Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan went flat, after slipping from a record top last week as the jump in U.S. bond yields unsettled investors.
Japan’s Nikkei recouped 0.8% and South Korea 0.1%, but Chinese blue chips lost 1.4%.
A COPPER-PLATED RECOVERY
One of the stars has been copper, a key component of renewable technology, which shot up 7.7% last week to a nine-year peak. The broader LMEX base metal index climbed 5.5% on the week.
Oil prices have gone along for the ride, aided by tightening supplies and freezing weather, giving Brent gains of 22% for the year so far. [O/R]
On Monday, Brent crude futures were up 0.7% at $63.33 a barrel. U.S. crude added 0.7% to $59.65.
All of that has been a boon for commodity-linked currencies, with the Canadian, Australian and New Zealand dollars all higher for the year so far.
Sterling reached a three-year top at $1.4050, aided by one of the fastest vaccine rollouts in the world. British Prime Minister Boris Johnson is due to outline a path from COVID-19 lockdowns on Monday.
The U.S. dollar index has been relatively range-bound, with downward pressure from the country’s expanding twin deficits balanced by higher bond yields. The index was last at 90.342, not far from where it started the year at 90.260.
Rising Treasury yields has helped the dollar gain against the yen to 105.60, given the Bank of Japan is actively restraining yields at home.
The euro was steady at $1.2104, corralled between support at $1.2021 and resistance around $1.2169.
One commodity not doing so well is gold, partly due to rising bond yields and partly as investors question if crypto currencies might be a better hedge against inflation. [GOL/]
Gold stood at $1,793 an ounce, having started the year at $1,896. Bitcoin was off 3.3% on Monday at $55,535, but started the year at $32,216.
(Reporting by Ritvik Carvalho; additional reporting by Wayne Cole in Sydney; editing by Larry King)
Sterling steadies around $1.40, long positions at one-year high
LONDON (Reuters) – The pound hit a new three-year high of $1.4050 in early London trading on Monday, before stabilising around the $1.40 level, as bullish investors bet on the UK’s vaccination rollout bringing about an economic recovery.
Sterling rose to its highest levels since April 2018 when it crossed $1.40 on Friday, having risen 2.4% so far in 2021.
Analysts attributed the recent strengthening to the UK’s relative success in providing COVID-19 vaccinations, which is expected to help Britain’s economy rebound from its biggest contraction in 300 years.
Relief that a no-deal Brexit was avoided at the end of 2020 is also supporting the pound, as is a lessening of fears that the Bank of England could introduce negative interest rates.
Speculators added to their net long position for the third week running in the week to Feb. 16, CFTC positioning data showed. The market is at its most bullish in one year.
At 0839 GMT, the pound was at $1.3992, down 0.1% on the day. Versus the euro, it was up around 0.2% at 86.42 pence per euro, having touched a one-year high earlier in the session EURGBP=D3>.
“The move higher in cable this year has been primarily driven by pound strength rather than US dollar weakness,” wrote MUFG currency analyst Lee Hardman in a note to clients.
“If the highs from April 2018 are taken out it will encourage expectations that the pound is adjusting to a new higher equilibrium now that Brexit risks have diminished,” he said. “Whereas if those highs remain in place, market participants may then start to question whether recent pound strength is overshooting and thereby increasing the risk of a correction lower.”
British Prime Minister Boris Johnson will set out a plan on Monday to release the UK from its third national lockdown.
Some 17.6 million people, over a quarter of the 67 million population, have now received a first dose of a COVID-19 vaccine. The UK is behind only Israel and the United Arab Emirates in vaccines per head of population.
The yield on British government bonds jumped on Monday, boosted by the prospect of heavy U.S. fiscal stimulus and the UK economy reopening.
“Markets are still adjusting to the fact that the Bank of England is unlikely to implement negative rates for now, leading to a narrowing of the US-UK 10-year yield differential,” UBS strategists wrote in a note to clients.
(Reporting by Elizabeth Howcroft; Editing by Bernadette Baum)
FTSE 100 falls as inflation concerns weigh
(Reuters) – London’s FTSE 100 fell on Monday as higher commodity prices sparked fears of a spike in inflation, while investors awaited Prime Minister Boris Johnson’s plan for a phased easing of business restrictions.
The blue-chip FTSE 100 fell 0.6%, led by declines in consumer staples and industrials stocks.
Oil heavyweights BP and Royal Dutch Shell dipped 0.1% and 0.3%, respectively, despite higher crude prices. [O/R]
Johnson will plot a path out of COVID-19 lockdown on Monday in an effort to gradually reopen the battered $3 trillion economy, aided by one of the fastest vaccine rollouts in the world.
The mid-cap index fell 0.3%, led by declines in financials and industrials stocks.
British Airways-owner IAG rose 1.1% after it said it raised total liquidity by 2.45 billion pounds ($3.4 billion), reaching final agreement for a 2-billion-pound loan, and through a deal to defer 450 million pounds of pension deficit contributions.
Pub operator Mitchells & Butlers shed 0.5% as it reported a plunge in sales due to all its sites having been forced shut under the latest lockdown.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V)
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