The ECN technology, despite not prevailing among the brokers who target retail traders, impacts positively on the trading activity. In fact, it offers a range of benefits which involve the most varied aspects, from the time of execution to the costs, from the relationship trader-broker (which sometimes can become complicated) to the psychological matter.
The role played by the ECN, besides, testifies the importance and the impact that the technology exerts on the activity of trading. A truth which is not obvious at all, especially for the less experienced traders, who tend to think that any broker is good and the software used for the management of the trading environment have a low impact on the profits.
What is the ECN technology
The ECN is a technology that supports the activity of intermediation of a broker. It is opposed to the market maker approach, which mirrors it despite some similarities. In order to understand what the ECN technology really consists of we will list its three main features.
Networking. ECN is an acronym. It stands for Electronic Communication Network. The ECN is therefore a piece of software able to connect the trader, broker and the market in a quick and direct way, reducing the necessary intermediations to place an order to the minimum. Thanks to the ECN technology, the traders can directly access the market, operating in a trading environment which, however comfortable, appears to be “extremely open”, at least compared to the most widespread Market Maker.
Direct orders. The traders who employ the ECN technology operate as much as possible directly. There are no third parties who take the order in charge and place it on behalf of the trader. The approach, is opposed to the market maker. This has specific consequences regarding the costs, the times of execution and in general the interaction trader-market.
Light intermediation. Obviously, it is impossible to operate in total absence of intermediaries. Nevertheless, the quantity and the role of these intermediaries makes a great difference. The ECN is the only technology that, even in a perspective of effectiveness, reduces the intermediations to the minimum. It is not a small detail: fewer intermediations means more rapidity, lower lagging time, more transparency.
The advantages of the ECN
In light of the features described, it is relatively simple to identify the benefits that an ECN broker can bring. Anyway, we should mention the most significative ones.
Spread. This is a consequence of the light intermediation. If the broker conducts a light intermediation and especially does not play the role of market maker, their costs are lower. As a cinsequence they can offer low spreads, much lower than the market maker brokers. In some cases they could even offer zero spreads or close to zero. It is almost trivial to specify that this dynamic impacts enormously the trading activity, from the economic point of view and more.
Time of execution. Also here, the central matter is that relative to the intermediation. If the intermediation is ligh and the broker does not follow a market maker approach, the orders are direct. And if that is the case, they are faster. In the worst case scenario, on average, the ECN brokers win against the market maker ones 0.5 to 3 (seconds). In the best hypothesis, one ECN oreder is issued in 200 or 300 milliseconds.
Prices and transparency. This is instead a consequence of the spreads near zero. In addition, if the spread are very low or zero, the prices with which the trader operates are incredibly close, or absolutely identical to the real ones. From here results a more crystal clear and simpler trading activity. Obviously, also the market makers declare their spreads, but operating with real or almost real prices without mental calculations is a completely different thing.
The effects of the ECN technology on trading
The ECN technology has a deep impact on the trading activity, although these effects might not be completely visible at first. Anyway, the most important effects that the ECN can generate are the following.
Costs. It is probably the most visible effect. The ECN brokers are cheaper than the Market Maker brokers. They are in any case, even comparing the most demanding of the ECN to the most convenient of the Market Maker. It is a physiologic and structural matter. Obviously, this dynamic is the result of the difference in terms of spreads, which are tiny or absent in the ECN, while they almost represent the main element of the economic management of the Market Maker brokers.
The impact of fast trading. The rapid execution of the orders is always an advantage. It becomes significant if the trader conducts Scalping. When aiming at a very restricted time interval, even fractions of a second could be determining and make the difference between profit and loss of capital.
The tranquillity factor. This effect is the “ultimate” product of the features described so far. It is obvious: if the trader is aware of saving, sure that their orders will always be placed instantly, if they know that they operate with real or close to real prices, they will trade with more tranquillity. And a serene trader, as novices and experts know, is a trader with higher and more opportunities of success. The ECN technology has an impact also from the psychologic point of view.
A tip on the ECN
If you are looking for a broker, or the broker with which you have opened an account is not satisfactory and you are considering changing it, be very careful about the technologic matter. The choice is mainly between ECN broker and Market Maker. It should be clear that the latter are not dangerous, nor necessarily opaque or counterproductive. Simply, the ECN brokers offer a higher number of benefits. Surely, the use is slightly more complicated but, considering costs, times of execution and transparency of the prices the game is definitely worth the candle.
Among the best ECN brokers Key To Markets stands out. Not only does this broker offer an incredibly advanced version of ECN, but offers super-competitive conditions. The policy of costs is extremely comfortable, the offer of assets simply limitless (there are more than 1500 tools). Moreover, the training and support services are of excellent level.