Why Retail Forex Brokers Shy Away from ECN Brokers

Without a doubt, the best choice for a forex broker to work with is a true ECN Broker. This type of broker offers no other accounts but ECN accounts and offers straight through processing (STP). This means they never mess up with the bid/ask spread and courses your orders immediately into the electronic communications network for immediate order matching by multiple liquidity providers and other market participants in the network.

Trading forex through an ECN broker means no slippage or re-quotes during highly volatile markets as is often the case if you are trading with a market maker. The deep liquidity pool of the network is also a tremendous benefit to the trader as this means the orders can be filled all the time at the best prices the trader wants them executed.

Unfortunately, despite these superior benefits, individual retail forex brokers continue to shy away from opening ECN accounts. The main reason being given is the higher initial capital deposit requirement needed to open such accounts. Ordinarily, a trader needs at least $10,000 to open an ECN account. But with the introduction of the micro and mini accounts, ECN brokers tried to scale it down to as low as $500 to $1,500 while adjusting the minimum lot size to 0.1.

Another, compelling reason why individual traders prefer to work with other brokers is the commission charges. While most brokers offer commission free trading for non ECN accounts, ECN accounts incur commission charges ranging from $1 to as much as $4 per lot on a round turn basis. Retail forex traders consider this a stiff price to pay for no slippage, no re-quote, on the mark trading with ECN accounts.

Naturally, traders will prefer the commission-free type of trading believing it will not cost them a cent to execute their trade. The truth however is, in lieu of the commission charges imposed on ECN accounts, the other brokers build in their profit instead into the bid/ask spread. As a result, they offer bid/ask quotes with wider spreads that can go as high as 8 pips in extremely volatile markets. Every experienced forex trader worth his salt understands that it is tougher to break even with such a big spread much less make a profit from your trade.

The age old problem that confronts individual forex traders up to this day is working the forex market through a broker who can act as the counterparty to their trades. This poses a serious case of conflict of interest. As the counterparty to the trading activities of their clients, these brokers will naturally want to win. As a result, they win the money the traders lose. This is exactly what ECN accounts are designed to address and hope to eliminate.

By merely acting as a middleman, the ECN broker has no interest on the trades made by its clients. The truth is, it is of no consequence to him whether the trader makes money or not. His interest centers mainly on efficiently processing every order coursed through it and make sure every order is filled fast and at the best prices possible. It would in fact benefit the broker a lot if his clients are making money on their trades because this will encourage them to trade more, earning for them more commissions in the process.

In summary, it may be more expensive to open ECN accounts but there is no substitute for trading the forex market with peace of mind knowing that your broker is not there to rob you of your hard earned dollars.

Guest post by FXCC – Forex Trading ECN Brokers