Recently, trading systems aimed at reducing the influence of the broker have started to become more widespread – Electronic Communication Networks or ECNs. And in the financial world there has more and more often been talk of ECN brokers and how ECNs are the future of Forex.
An ECN represents a floor or network in which liquidity providers and individual traders conduct transactions among themselves and cut out the middle-men. If we ask ourselves the question what the relationship of Forex is to ECN systems, we can say quite boldly that is that actual “interbank” that dealing centers and market makers so often mention. To be more exact, trading in the interbank currency market is performed thanks to ECN systems that bring together a multitude of participants in the currency and financial markets.
At the basis of the operation of any ECN floor lies a system of pairing orders. This means that trading orders from all ECN participants are entered into a common database. Opposing orders (buy/sell) from the various participants are executed when their basic parameters such as asset, volume and price, coincide, that is, the system automatically selects the corresponding orders and executes them. Characteristic of the interbank market is the fact that the clients’ orders for the purchase and sale of a given financial asset are executed at current market prices.
One of the key features of an ECN is the absence of conflict of interest between broker and trader. An ECN broker only transmits traders’ orders into the system (that is, brings them to the interbank) and earns money exclusively on the commission from each deal. Another no less important feature of the ECN is the possibility of taking part in price formation. Each trader can influence the spread, narrowing it by setting limit orders within the spread – the determining factor here will be the volume of the limit order. The greater the order’s volume, the greater the influence that it can exert on the current price.
One other distinguishing characteristic of the ECN system is the special process for executing pending orders. When the current quote for the trading instrument matches the value given in the pending order, the order is executed. However, in certain circumstances pending orders are executed partially. This is due to a discrepancy in the transaction sizes in offsetting positions.
An advantage of no small importance of the ECN is its transparency for traders — orders that have been received are shown in the system and the information on them is accessible to all participants in the trading.
At the present time more and more financial experts are arriving at the common opinion that the ECN system is a step forward towards transparent and easier trading in the currency markets, and it is good that these systems are at last gaining more and more popularity in the Forex market. Institutional players and the funds market have already long valued the advantages of ECN systems. Now this opportunity has also become available for the individual trader trading in the Forex market. Only a few years ago access was impossible for the ordinary retail trader to the major ECN floors such as Currenex, Integral or FXall.
Professional traders are gradually coming into the market now who operate with very large sums and wish to have a guarantee not only of the safety of their money, but also of receiving the profit they have earned. The activity of ECN brokers is, as a rule, regulated by more serious and reliable licensing than is the case with many dealing centers and small market makers, which guarantees the transparency of operation and reliability of the broker. Compared to the majority of dealing centers, ECN brokers offer a completely different level of conduct of transactions, higher speed for executing orders, and execution of them on the best terms existing for the trader at that moment.
In connection with ECN, one of its important analytical tools is worth mentioning. This is the combined “open bid book” or, as it is also called, “Level 2 Quotes”, which show the depth of the market. These Level 2 Quotes, presented in the form of a table, contain information on limit orders set by participants on the ECN floor for specific trading instruments, namely data on the volumes and prices of bids. In other words, in the table the trader can always see the lowest “Ask” prices and the highest “Bid” prices, and at the same time the corresponding volume of bids, for the instrument in which he is interested.
At the present time all of the more or less major market makers are introducing, or have already introduced, interbank accounts, because introducing them is a sign of a broker’s new level of development. Recently EXNESS has also been registering accounts for operating in the interbank market and offers traders the opportunity to start trading on its ECN-system, which brings together well-known liquidity providers and ensures order execution at the best prices.
EXNESS offers clients access to the interbank market through an ECN system the basis of which is a programmed “aggregator”, which coordinates the execution of client bids at best prices amongst the several well-known brokers connected to it. At the present time the following major brokers are the Company’s liquidity providers: ADS Securities, EXANTE, FXCMPRO and MARKET SECURITIES.
Before the launch of this project, all departments in our company completed a huge amount of work. Practically every EXNESS employee was involved in the creative process. A new company division was formed to implement the task and to provide subsequent support. The long-term preparation that went into launching the project was driven by the desire to create a unique service that was previously available only to a narrow circle of professionals. In full accord with our concept of accessible exclusivity, what was in the past only accessible to the top banks has now become accessible to every trader.
In following modern trends in the development of the Forex industry, EXNESS experts have tried, while working on implementation of the project to bring clients’ bids into the interbank market, to take into account all our clients’ wishes and preserve the best traditions of delivering service of the highest quality. First and foremost that means narrow spreads on the most popular instruments. Multibank liquidity from leading providers promotes the formation of the best prices. Secondly, the ability to replenish and withdraw funds from a trading account via many electronic payment systems. The new system retains the flexibility and convenience of adding and debiting funds to and from the trading account. Thirdly, it means the ability to hedge offsetting positions for one instrument in the MetaTrader 4 terminal. As always, nothing hinders our clients from applying their own trading strategies in the normal MT4 terminal. Fourthly, trade inside the spread — traders themselves can influence the best buy and sell prices by setting limit orders within the spread.
In summing up all of the above, it may be stated with confidence that the interbank currency market will indeed only continue to gain in turnover and grow steadily in the future, and our company will continue to develop along with it.