How does an ECN Forex System Work?

Speaking of how the ECN brokers work, they work with the matching orders as well source the matching orders from their clients termed as Tier-1 liquidity providers. ECN brokers have an important role to play. How? The clients of the brokers include big banks, individual investors, large financial institutions, hedge funds and investment houses. All of these tier-1 liquidity providers or elements comprise the interbank forex market. On one hand, they offer the best currency rates; on the other hand, their minimum trading transactions are in such high volumes that the ordinary individual traders can hardly afford to trade.

As a forex trader, you need to have an established credit line if you want to be eligible to trade with them; hence, be able to take advantage of the rates of Tier-1 liquidity providers. Due to the requirement of an established credit line, most small players and retail forex traders are kept from trading with them. Hence, the role of ECN brokers come into play. Basically, ECN brokers are a bridge between the smaller market participants and the tie-1 liquidity providers.

Thanks to FIX protocol technology, the ECN brokers are linked with the tier-1 liquidity providers. This technology enables brokers to deliver the orders of the clients to the liquidity providers for execution. In simple words, ECN brokers enable the small market participants to directly access the exclusive interbank rates. Meanwhile, the quotes that brokers offer to their clients come directly from the liquidity providers.

ECN or the electronic communication network links the participants of forex market together. It is software which automatically executes the matching orders to make a transaction. The program works in a very simple manner; when the network receives orders, it matches them with opposite order of the same volume. In case there are unmatched orders, they are published so that they can be matched with opposite orders.

While doing forex trading, you must understand that neither you are trading directly with the network itself nor you are dealing with a single entity. The network is very big and there are many liquidity providers; so; you never know which provider matches your order. Simultaneously, the liquidity providers never know from whom a particular order is coming from.

The program is designed in such a way that it automatically matches the orders of the same volume and publishes the unmatched orders. The unmatched orders comprise the pending sell and buy orders with volume and targeted prices giving the traders a better insight on market depth. On top of all, it is completely anonymous to trade with an electronic communications network.

Due to the element anonymity, the network is free from any bias or conflict of interest and the brokers are not the market makers. They simply charge a small commission on all orders they process. Every order is processed automatically and instantly so there is no dealing desk that you should be worried of.

ECN brokers have an ideal business program what utilizes straight through processing. All the orders received from clients are passed instantly to the pool of liquidity providers to be executed immediately. Since there are multiple liquidity providers, the orders are guaranteed to be executed immediately at the best possible rates. The price aggregator is automatic program which scans the network for all buy and sell orders that are in the system. After scanning, this program automatically and instantly matches with the opposite orders or offers from the liquidity providers.

Guest Post by AFB FX – ECN Forex Trading Broker