What are ECN Forex Brokers and How are Their Fees?

ECN forex brokers carry relatively higher trading fees, but more suitable for professionals who seek to make use of expert advisors or scalping strategy.

When you are looking for forex brokers for the first time, you may find a lot of mentions about ECN, STP, and Dealing Desk brokers. It is said that ECN forex brokers are superior compared to STP and Dealing Desk brokers. Is this true? What are ECN forex brokers and how do their fees compare to other types of brokers?

What are ECN Forex Brokers?

ECN is shorthand for "Electronic Communication Network", a type of bridge that is used by brokerage companies to connect retail forex and CFD traders to their liquidity providers. ECN bridge enables buyers and sellers between these parties to deal directly, without passing through the broker's dealing desk. This is the reason why ECN forex brokers also often called "No-Dealing Desk (NDD)" brokers.

ECN is not the only method that is commonly used by brokers to connect traders with liquidity providers. There's also Straight Through Processing (STP). According to STP protocols, traders' orders are directed to the liquidity pool where orders will be executed according to the best price policy. However, the ECN bridge is considered superior because of the preception of non-interference from brokers.

Do ECN Forex Brokers Provide Better Services?

ECN bridging technologies will enable forex brokers to provide excellent services for some, but it may also prevent them from providing other types of services common among STP and market makers. So, it is not that ECN forex brokers are better per se. Depending on what is your trading style, you may or may not need ECN forex brokers.

There are at least four ECN forex brokers advantages:

1. Fast execution: Some STP and DD forex brokers may claim to have fast execution, but ECN forex brokers are still the fastest. Traders' orders will not be handed to an internal dealing desk nor undergo processing that may require several seconds.
2. Transparent pricing: ECN forex brokers will provide real market quotes through Depth of Market (DoM) that could be accessed freely by traders in each trading platform. Therefore, there are fewer disputes between traders and brokers in relation to price execution.
3. Real market spread: ECN forex brokers offer interbank connectivity without any interference. Therefore, prices are real market prices and spreads are free of mark-up.
4. No requotes: If there are no suitable prices for your orders, the broker will not offer "alternative prices" such as requote. Instead, orders will be filled at the next best price available ored until there are suitable prices (see brokers' policies).

On the other hand, ECN forex brokers may have limited capability to reduce trading fees. They could not create a fixed-spread account, zero-spread account, cent account, and so on. ECN forex brokers could not even provide free commission services, because the commission is their main source of income.

How Do ECN Forex Brokers Charge Trading Fees?

ECN forex brokers may charge up to four types of fees, they are:

1. Spread: As mentioned previously, ECN spreads are real market spreads. ECN forex brokers with tier-1 liquidity providers may provide lower spread compared to ECN forex brokers with connections to tier-2 aggregators. ECN forex brokers with the lowest spread are also known as "raw spread forex brokers".
2. Commission: As ECN forex brokers could not mark-up trading spread, commission fees become their main source of income. Commission fees may be charged per side or per round turn. One "round turn" means one round of opening and closing position, while one "side" means the execution of half-round.
3. Swap (overnight fees): Most ECN forex brokers have to charge swap fees for positions held overnight, in accordance with market rules. If you often need to hold positions for several days at a time, then ECN forex brokers may not be your cup of tea.
4. Deposit/withdrawal fees: This is where some ECN forex brokers may compete with each other. Some brokers may charge nothing, while some others charge more.

All in all, ECN trading fees may be comparatively higher than STP dan Dealing Desk forex brokers' charges. In comparison, DD brokers create their own market and can freely determine their prices. Beginner traders may also find DD brokers' terms and conditions more favorable, due to the reduced fees and minimum capital requirements.

ECN forex brokers are more suitable for professionals who seek to make use of expert advisors (trading robots) or the scalping strategy. Traders will be guaranteed of receiving the best market prices and free of brokers' interference. But you have to make sure that your ECN broker has received licenses from a competent regulatory body, in order to avoid scams under the guise of ECN. For comparison, see some of the best ECN brokers worldwide such as IC Markets, Pepperstone, and Alpari.

The three brokers' specifications can be compared below:

For more forex broker comparisons, try our tool here.