One of the most important questions a FOREX trader faces at the beginning of their career is what type of broker they will use. There is a wide range of broker types from which to choose. Different brokers offer several distinct features and account types.
Two account types in the FOREX world that are commonly compared side by side are the Electronic Communications Network (ECN) account, and the standard account. Deciding between the two will come down to which of the main characteristics of each account a trader feels is most important to them.
As the FOREX market is not centralized and does not take place on a regulated exchange, it is often the case that traders can pursue the exact trading conditions with which they feel most comfortable. A key contributor to the trading conditions consideration is whether to choose an ECN account or a standard account.
What Is an ECN Account?
An ECN broker is one that uses electronic communications networks to directly connect traders with important players in the FOREX market. These players provide, among other services, access to equity, liquidity and currency. They could be banks, hedge funds and other brokers. This trading type deserves special mention because before the days of safe and instantaneous global communications, ECN trading was not possible.
In the days before dependable ECN services, FOREX trading was conducted primarily along the lines of the service offered by a standard account, which is a where a broker acts as a counterparty to the trader’s orders. While acting as the counterparty, the broker deals with the market participants it requires to execute the trade out of sight of the trader.
Today, ECN brokers remove themselves as the counterparty and match traders’ orders directly with players, like liquidity providers. By consolidating real-time price quotations from carefully selected partners, the broker can provide the trader with extremely tight bid/ask spreads. The broker gives the trader access to better spreads and extracts a commission in exchange for this service.
One crucial factor to note about ECN brokers is that they match orders between market participants, but they cannot trade against clients. Therefore, it is by design that ECN spreads are tighter than the spreads offered by normal brokers. However, in exchange for spreads as low as 0.0 pips, ECN brokers always take a commission per transaction. It is for this reason that ECN brokers are known as non-dealing desk brokers. This simply means that they put participants in a trade together in electronic form and do not execute the deal themselves.
Now that we know what an ECN broker is, we can see that an ECN account is nothing more than an account where the broker can match the trader’s orders by putting them in direct contact with third parties who can execute their trades. It is the fastest and most efficient way to put traders in touch with FOREX players, like banks, hedge funds, and other liquidity companies.
The standard trading account is one where the broker acts as the counterparty to your trade. Each trade needs at least two parties, a buyer and a seller. In this case, you buy FOREX directly from the broker without concerning yourself about other market participants from which they are procuring liquidity services.
This type of account uses fixed spreads, meaning that the broker will normally inflate the difference between the bid and ask amounts by a figure of their choosing, usually about 2 pips. This way, the trader knows what to expect before every transaction. The fee calculations involved in a standard account are simple and predictable, which is an important benefit to a new trader.
Standard accounts require a bigger financial investment because it is a slower-moving market than ECN trading, where many smaller trades can take place instantaneously over electronic channels. Standard account holders are allowed access to standard lots in each currency. A standard lot is worth $100,000, but with leverage of, say, 1:100, you only need to provide $1,000 to start to trade.
A new trader can become highly conversant with this type of account and make good money, but they should not forget that the fixed spreads are higher by design, and, over the long term, they could get lower spreads with other types of accounts, like the ECN account.
ECN Network Explained
The network that underpins ECN trading creates a dynamic space for buyers and sellers to be in the same market to negotiate and finalize orders. The main thing that facilitates this is rapidly shared information. The network automatically matches buy and sell orders that are available on the exchange.
ECN trading offers liquidity through a network. Therefore, all the information relating to active bids and offers available for trading is available in a bustling electronic marketplace. The system was designed to be more efficient and streamlined than traditional counterparty trading and is, therefore, characterized by tight spreads, sometimes as narrow as breakeven.
The Difference between an ECN and a Standard Account
There are some significant differences between the two account types:
ECN trades are executed when the broker connects the trader directly to liquidity providers. This is a non-dealing desk model. Standard account trades are filled from within the broker’s partner pool, rendering this a market-making model.
ECN accounts simply match orders and charge a commission per trade for the service. ECN accounts do not place a premium on the raw spread, which can be as tight as 0.0 pips.
By contrast, standard trading accounts apply premiums to the raw spreads as their primary revenue line. As a Standard Account holder, it is widespread practice for you to pay a two-pip spread on most currency pairs. As the counterparty to your transaction, the broker needs to make money from the trade.
ECN accounts come with a lower effective fee amount than standard accounts. We will show you how this works out later in the article.
Pros and Cons of an ECN Account
Here are some key factors to consider before opening an ECN account:
The main benefits of the ECN account can be grouped into transparency, fairness and speed. With ECN trading, all brokers have access to the same information in the form of a market newsfeed that shows up-to-the-minute pricing, including price history.
This means there is ample information that allows traders to spot trends in the market. There is also less chance of price manipulation, something that traders appreciate as their skill levels improve and they come to better understand the trading landscape.
ECN trading provides a faster paced institutional level of transacting. It is much more akin to how professionals trade. ECN brokers thrive on high trade volumes, something that can only be achieved when you get large numbers of skilled and knowledgeable traders working together in a bustling marketplace.
ECN brokers allow investors a way to trade outside of normal trading hours. This is an effective way for traders who cannot take part in the market during standard working hours to partake in it. ECN accounts provide greater flexibility as they provide electronic access to markets on a 24/5 basis.
ECN brokers offer superior privacy. For those worried about their information being transmitted over electronic channels, there is an elevated level of anonymity to ECN trading as all participants invest in the most up-to-date security features.
Over the long run, ECN trading is less expensive on a per-trade basis than using a standard account. We will explain this more in the fees section of this article.
ECN liquidity can sometimes run low. Often, when important economic news is about to break, traders will choose to hold off on trading. It could even be liquidity providers that throttle supply in anticipation of a rise in demand. This can cause trading lulls in which liquidity is scarce due to market dynamics.
Pros and Cons of a Standard Account
Here are the factors to consider before opening a standard account:
Standard accounts are easy to handle and the cost of execution, although a little higher than some traders prefer, comes with the benefit of predictability. Working with fixed spreads is unthinkable to some traders as it seems restrictive, but other traders, especially novices, sit on the other side of the fence and appreciate the predictability of fixed spreads.
Knowing that each trade will cost you two pips regardless of market conditions could work for traders in times of volatility. Knowing exactly what fees to expect makes it easier to plan. Swing traders enjoy this type of account.
A swing trader takes up longer positions, from a few days to several weeks. Their intention is to take advantage of currency swings that can be predicted from world events. By locking in the spread of two pips, they are in a better position to know when they can profitably call in the trade.
If you are a frequent trader, you might be paying something like 1.3 pips extra per trade on a standard account versus an ECN account. This inflated cost of execution adds up in the long term.
Fee Structure of Each Account
It is fair to say that the standard account is the realm of newer traders trying to understand the trading landscape. They feel comfort from having a predictable spread, and they can learn the markets from there.
Users of the ECN account, on the other hand, tend to be more advanced in their trading career. They will not settle for entry-level tools and are starting to hunger for a faster and more dynamic interface. They understand that their trades can be directly presented to institutional liquidity providers and they seek that level of market involvement.
As we have mentioned, the ECN account normally comes with very tight spreads, sometimes as low as 0.0 pips. This is an attractive proposition, but there is no such thing as a free lunch, as we all know. ECN brokers make their money from a commission of roughly $3.50 per lot ($100,000) that is standard in the market. Therefore, on a round-turn lot (a complete transaction featuring both the buy and sell portions), ECN account holders would pay $7. Thus, when trading one standard lot, you pay:
With the ECN account, $7 per round turn, which equates to 0.7 pips
With the standard account, the market standard spread of 2 pips
Put another way, because the ECN account bears a commission of $3.50 per lot, or $7 per round turn, it is the equivalent of 0.7 pips if it was a fixed spread. Remember, all it takes for you to complete trades on an ECN account at better execution rates than a Standard Account is anything below what the Standard Account can offer, which is two pips, therefore, 0.7 pips is a far better deal.
Remember, though, that this assumes an ECN spread of 0.0 pips. This is sometimes the case, but not nearly always. Consider that the tightest spreads can be found between dominant currencies with low volatility. As you begin to trade in minor and exotic pairs, you will see spreads widen to cater for volatility. It is the same scenario with ECN accounts. When using this account type, you will sometimes see spreads between selected currency pairs that are rather wide. This must be factored into the financial calculations.
For the most part, traders who are conscious of how much they pay in fees will start to make a comparison between the two accounts and come up with the conclusion at which we have just arrived–ECN trading can be more cost effective than using a standard account.
If you are a trader who recognizes this and is ready to progress in your career, then you will likely graduate from a standard account to an ECN account before too long
The main difference between ECN accounts and standard accounts is that the ECN account allows you to execute trades at markedly lower fees. The ECN is also faster and much closer to professional trading for those who are looking for an edge.
You might wonder why brokers even bother with the standard account. The reason is that they know FOREX and trading in general is a daunting prospect for any newcomer. By offering a standard account, they can gain a new customer, even if they can be confident that the trader will graduate to an ECN account over time.
The ECN trading account is favored by many retail traders who are serious about their investing career and would like to adopt as professional an approach as possible. After all, ECN trading is fast, fair, and anonymous. Traders get equal treatment in the ECN realm, regardless of the size of their trades.
The standard trading account exists because it gives comfort to traders who are not sure of the ropes just yet. There is a lot to be said for using a broker that offers you the flexibility to trade with the tools that make you comfortable.
What is the difference between an ECN and Standard account?
An ECN account matches your orders with market participants like equity and liquidity partners. The broker does not get involved with your transactions, except to put you in contact with third parties in an electronic marketplace. This non-dealing style means the broker only charges you a commission for providing you with access to its network. The commission figure is normally within a narrow market standard.
What is an ECN account?
An ECN account is an order-matching execution system. The broker charges a commission per trade for access to its electronic service. There is no premium placed on the spreads for this service, only a commission. By using the account, you get direct access to liquidity providers, banks and other brokers as you decide on which orders to place.
What is a standard account?
A standard account is one where the broker acts as a market maker on your transactions. It takes your orders and sources the liquidity you need from selected partners. You deal with the broker directly and never have access to any other market participants. This means you must accept the spreads the broker offers and the possibility that the broker is leveraging the deal in their favor as they are in control of much more of the order and execution process.
What is ECN trading?
ECN trading is trading through an electronic communications network (ECN) broker. This type of broker offers an order-matching execution service that is conducted over the broker’s electronic platform. The broker charges a commission per trade for the service.
How do ECN brokers operate?
An ECN broker offers a no-dealing desk execution model, where the broker facilitates a client trade by matching buyer and seller. ECN traders are known for having no conflicts of interest with traders who do not act as counterparties to the trade, and only take a commission for their work. The commission is relatively low and traders feel the system is fairer as they have sight of much more information related to their orders than they would with a standard account.
What is ECN pricing?
ECN pricing involves charging a fixed commission on trades. Standard accounts levy a premium on the spread, but ECN accounts do not, instead they concentrate on recouping a commission per trade.
What is standard account pricing?
Standard account pricing is when brokers widen the spread on a currency pair to ensure they get a cut of the transaction. It is sometimes thought that brokers have a conflict of interest in this scenario as not only does the broker act as the counterparty, meaning they can choose to deal with the third party that most benefits them, but they also get to charge a premium of their choice on that spread.
Which is cheaper, ECN or standard?
It is thought that the ECN account works out more cost effectively over time. At the level of pure cost per transaction, the ECN account is probably lower than the standard account. However, when ECN accounts handle minor pairs, or when ECN accounts are used for high volumes of transactions, they can become more expensive, so the difference is not so pronounced.
Which account should new traders use?
New traders would benefit from the standard account, which has a predictable fee structure. This is not to limit them. They could start with the ECN account if they are committed to learning as much as they can as quickly as they can. ECN accounts can feature overwhelming levels of detail, but the committed novice can master the market if they apply themselves.
What are the best features of an ECN account?
ECN accounts are known for their speed of execution, anonymity and price fairness. Many traders come to appreciate the ECN account even if they start out with a standard account. ECN accounts are known for their transparency as traders see the bid/ask prices directly, free of any intermediary involvement.
Can I change from an ECN account to a standard account or vice versa?
If your broker offers both types of accounts, it should not be too difficult to change from one account type to another. Most brokers will offer both account types as they can serve a wider case of traders by offering both.