ECN Forex Spreads - How do they differ from the rest
There are a lot of few subtle factors when trading in forex that can determine your overall success. An important aspect that often goes unnoticed, especially with beginners in forex trading is understanding the type of forex broker. There are primarily two types of forex dealers.
Market Maker Forex Brokers
ECN Forex Brokers
The difference being that every forex broker displays the price feed, which is nothing but the BID/ASK price for a currency. If you closely observe, the BID/ASK prices are very different when you compare an ECN forex broker's prices to that of a Market maker. One might wonder if the difference in price is of any significance. The fact remains that when you trade forex, a broker charges commissions or spreads. The higher or lower this difference or spread is, the more chances of making profits.
Market Maker Forex brokers: A market maker forex broker is one that manually sets their BID/ASK prices. The prices on the assets such as currencies, commodities and so on are not entirely in real time. Further more, a Market maker always places a counter party trade that is in the opposite side of your trade, also known as conflict of interest. With a Market maker, there are two outcomes. Either the forex broker wins when you, the trader loses or vice versa. This model, as obvious has its flaws are most forex brokers would like to win in most of the trades.
An ECN Forex broker relays your trades directly thus void of any manual intervention, whilst on the other hand a Market maker requires a dealing desk in order to execute your trades. Most traders often experience what is known as Slippage or Re-Quotes. This is when by the time your trade is actually executed by the broker, the price would have changed, thus alerting the trader about the new prices and if they wish to proceed or not. There are no slippages or forex re-quotes when you trade with an ECN forex broker.
ECN Forex Trading - How are the spreads displayed
To put it in simple terms, when trading with an ECN forex broker, a trader would place a BUY/BID order from "Bank 1" in the ECN liquidity pool and can make use of "Bank 2" to place a SELL/ASK order. This is because in ECN forex trading, only the best possible spreads are displayed and thus by making use of their large liquidity pools, traders are shown the best prices.
In order to understand how the spreads are displayed with an ECN Forex broker, let's take a look at this example.
An ECN Forex broker is has two banks, A and B in their liquidity pool
The spreads from Bank A are: 1.3213 (bid) and 1.3215 (ask).
The spreads from Bank B are 1.3214 (bid) and 1.3216 (ask).
So the ECN forex broker's prices would be displayed to the trader as
1.3214/1.3215. The BID price from Bank B and ASK price from Bank A.
As shown above, with ECN forex trading, the trader would always get the best possible spreads. This is because an ECN forex broker charges commission and not on the spreads as is the case with a Market maker type of forex broker.