How to operate an Broker ECN

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Anonymity on your trades

When buying and selling with an ECN, all transactions are completely anonymous. When you make a trade through an ECN, your trades and your account cannot be identified and traced back to you. This protection of privacy is something most traders like about the ECN brokers. This is especially important to you when using a relatively predatory or aggressively natured trading strategy. In this case the anonymity an ECN provides is vital to protect your potential performance and trading strategy.


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Act as your own market maker

You have the ability to make your own market or act as a market maker when trading with an ECN broker. You can place an order in between the bid and ask spread, in the hope that the ECN will find another market participant who will match your order. You can even place orders outside the bid/ask spread and attempt to gain several pips by creating your own spread. This can be done by placing a limit sell order at the ask or higher while simultaneously placing a limit buy at the bid or lower. Additionally you can place limit and stop orders without any restrictions or limitations. Other brokers may have restrictions on how close you can place limit and stop orders, in order to discourage scalping. For example some restrict you from placing a stop loss order within 4 pips of the market price.


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Tight to no spreads during highly active trading periods

Spreads are not fixed on an ECN. The spreads on a particular currency pair will continuously vary depending on the volume being traded in that pair and the available liquidity to support the trades. ECN brokers get pricing feeds from multiple institutional market participants and display the best quote on their trading platform. With quotes flowing in from numerous institutional sources, spreads on the bid and ask can get extremely tight and can even reach zero. This occurs more than one would imagine, especially during very active trading periods. This tight to zero spread pricing will particularly benefit you if you are using a scalping or day trading strategy. On an ECN network these tight spreads give you an edge in your trading strategies that can be critical to both scalping and day trading strategies. For instance, if a scalping system typically has an average gain of 5 pips on a pair that normally has a 2 pip spread, then the net gain will be 3 pips after a full round trade. However if this strategy was applied on an ECN the trader could drastically lower his spread to say 0.8 pip. The gain then becomes 4.2 pips per trade and after you take out the commission of approximately 1 pip per full round, you are left with a 3.2 pip gain, about a 7% gain over the fixed spread method.


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Improved execution on your trades

ECN brokers provide you with improved execution on your trades. It is important to realize you are not trading directly with the ECN, you are simply using the network provided by the ECN. The ECN is solely focused on matching up your order with the opposite side held by another market participant on the ECN as quickly as possible. Since you are dealing with numerous large liquidity providers and are not dealing with one single entity, execution is enhanced. With an ECN, you are able to see several of the best quotes being offered at a time in a currency pair by market participants. This allows you to get a sense of the market depth in the currency pair because you are able to get a better sense of how deep liquidity may or may not be. For example let’s say you saw several offers near and at the bid, but only a few at and around the ask on a particular currency pair. This might indicate a potential shift in market price, which if you were to spot before the move, could benefit your trading. This is a huge advantage that can greatly enhance your trading due to the added information provided by the ECN.


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News and Event Trading

The ECN is particularly ideal for event or news trading where markets can get extremely volatile. With access to a network of many institutional liquidity providers, you can still get your order successfully filled even during the most volatile situations. ECNs never restrict trading during news events. Trading always continues.* With ECNs, the price you see is the price you get. This is vital for event and news trading, where success can depend on you being able to create specific entry and exit points at the price you want. Because of the nature of volatility associated with news and event trading, getting caught on the wrong side of a trade and being unable to quickly exit can be an extremely negative factor on your trading performance.

This does not mean you can always get in or out of a trade. ECNs simply list the best offers. If there are no current offers or liquidity becomes scarce, execution of your trades could be hindered.


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Increased price volatility

Prices are not fixed on an ECN and there can be large price swings in volatile trading periods. This increased volatility helps with short term trading and scalping strategies. Scalpers and short term traders can quickly claim large profits during volatile times, if the price swings largely in their favor. These types of gains are possible because of the large depth of liquidity an ECN provides. Instead of having to wait and watch as a spread may change and shift, you are able to stay in or get out of the market when you choose. Even though this may only be a few seconds, those few seconds could be the difference between a several pip gain and a several pip loss.