What is an ECN account and what are its benefits?
Often, when choosing a financial intermediary, you can see the presence of an ECN account, which is usually an order of magnitude more expensive than other brokerage accounts and has zero spreads. However, before recklessly opening an ECN account and expecting big profits from it, you need to understand its characteristics and carefully weigh the pros and cons.
Short definition of ECN
The name ECN is an abbreviation and stands for Electronic Communication Network. Describing an ECN account for dummies, it is worth saying that this is an electronic trading network for making transactions on the Forex market without intermediaries, directly. Orders of all traders who use such accounts are in the same DOM and are executed automatically.
Basic characteristics of ECN accounts
So what are ECN accounts? This is a type of account that can be opened with a broker for a fee. The electronic trading system is used by most hedge funds, banks and financial intermediaries; they open their orders through the network and institutional bidders. Thus, there is enough liquidity in the market for instant execution of transactions with a minimum price difference.
As a rule, there is no fixed spread in an ECN account. The average spread is 0.1 pips, which brokers make up for with commissions per trade, mostly up to $10 per lot. Of course, this does not mean that traders with such accounts are insured against sharp jumps in volatility. However, this way of trading is in many ways more profitable for investors who actively trade in the Forex market, because in this way they can save on each transaction.
Main advantages of ECN accounts
Having figured out what an ECN account is, you should consider the main advantages of this system. Although some of them have already been briefly mentioned above, the investor should pay attention to other features:
- Single DOM and high liquidity – this eliminates requotes and ensures fast order execution;
- free choice of counterparties – no restrictions;
- minimum spread – during periods when there is no strong volatility, traders with an ECN account close trades with 0 spread;
- reliability and security – thanks to the automated closing of orders, the possibility of manipulation with quotes is excluded.
Disadvantages of the Electronic Communication Network system – what should be remembered?
Although an ECN account is a convenient and flexible option for active traders, there are still some drawbacks that you need to be aware of. For example, a large threshold for opening an account – access to interbank liquidity implies trading on a par with large trading participants, and therefore sometimes more than $1000 on the balance sheet is needed to complete a transaction.
In addition, working in such a system requires certain trading skills, since we are talking about large amounts. Some brokers with ECN accounts offer demo accounts for risk-free practice. It is also worth mentioning that the list of assets for trading in this system is somewhat limited – here you cannot trade CFDs on securities.
Conclusion – how to choose the right ECN broker?
To make the right choice and not lose money, a trader must carefully study the offers of intermediaries and the opportunities that are available to him. An important role is also played by reviews published about brokers with ECN accounts, in which users talk about their trading experience.
Transparency regarding the choice of counterparty, Depth of Market and open access to key electronic trading systems are the main characteristics of these accounts. So the investor can quickly find a suitable intermediary and move to a new level of trading.
