Over the last 10 years, the mediums through which trades can be made on the Foreign Exchange (‘Forex’) market, including companies like IronFX, have diversified significantly. Currency trading is no longer limited to interbank activity conducted on behalf of private investors and companies exclusively. Over time, the banks themselves have set up the means to trade on the Forex markets themselves. This in turn was followed by multinational corporations, hedge funds and wealthy individuals. Because of this, a retail market has developed aimed at individual traders, providing easy access to the forex markets, either through banks or private brokers like IronFx. One of these new developments includes the creation of ECN (Electronic Communication Network), which is –loosely described- a bridge between smaller market investors and tier-1 liquidity providers, through a Forex ECN broker.
The connection is provided using “FIX Protocol” technology, (which stands for ‘Financial Information Exchange’). Through this arrangement, the broker secures liquidity from tier-1 liquidity providers such as high street banks, and offers a method of making this liquidity available to its clients. The broker then delivers clients’ orders to these liquidity providers. ECN brokers then take a commission for each transaction, allowing them to accumulate profits through higher trading volumes.
The benefit to clients for trading through ECN is the ability to make larger transactions, whilst maintaining high levels of liquidity, allowing them to move their money more freely, even at times of reduced liquidity. IronFx offers ECN accounts, which take advantage of the improved liquidity and real-time trading options of ECN.
ECN trading activity is completely anonymous; this allows traders to take advantage of neutral prices, which in turn represent more accurately, the actual market conditions. Trades are not biased against the client’s actions based on Forex trading strategies, current market position, tactics or reputation. Clients also benefits from the ability to trade instantly through live streams, with immediately executable price confirmations. Re-quotes are not an issue, as there is no dealing desk which can interfere with a trade. Trading through ECN allows clients, both corporate and private, to trade based on the global liquidity of major banks and qualified financial institutions. ECN does not, however, control the bid/offer spread, and cannot provide a static spread at all times. Because clients have directs access to prices in the market, these are liable to fluctuate depending on supply and demand, economic strength, volatility and many other variable conditions. ECN clients often trade on relatively tight spreads, which can be as low as 1 pip (or point) on major currencies, during normal market conditions.
There are some distinct disadvantages, however, to trading with ECN. These can include the high levels of fees/commissions charged. The structure of the ECN network is to charge commission on every trade. When these commissions are accumulated, they can become more expensive (as more trades are executed every day). This can impact the profit accumulated by traders, meaning that many –more experienced- traders may reject the use of ECN. Another problem experienced by ECN traders is market dishonesty. ECN is designed to allow each investor to effectively act as their own market maker. This can, unfortunately, promote the practice of dishonest or usurious trade within the market. This happens when dishonest traders start introducing high volume trades, in order to unfairly influence the market. Also, some traders may mislead or deceive traders into believing they are ECN brokers, when they do not use ECN at all.