Many brokers who claim to provide ECN pricing may not be true ECN brokers. Here are some tips to distinguish them and a list of True ECN brokers to choose from.
A True ECN broker is a forex broker who connects to interbank liquidity sources such as banks, hedge funds, and mutual funds through electronic communications network (ECN) operators. Your orders will be forwarded directly to liquidity providers, which is why they are also known as "non-dealing desk brokers".
True ECN brokers work as intermediaries to match your transactions with global market participants, so they cannot bid against you (unlike market maker brokers, who stand on the other side of your trades). As they receive a commission fee based on your trading volume, they have an incentive for you to succeed so they can benefit.
The True ECN Brokers
We have browsed through dozens of international forex brokers and found four True ECN brokers with sufficient credibility. Here they are:
Sure, there are controversies as to whether this or that broker actually uses ECN technology or not. However, the four musketeers above have straight-out declared themselves as providers of ECN pricing, and they own the appropriate licenses and liquidity depth to support the claim.
Differences between "ECN Brokers" and "True ECN Brokers"
ECN brokers commonly offer variable spreads starting at 0 pips, dubbed "raw spreads," that are fed directly from the market. Spread fluctuations are highly dependent on current market conditions, and can sometimes change dramatically during periods of high volatility and low liquidity.
Because ECN brokers do not mark up spreads, they have to charge commission fees to make up a part of their income sources. Commission fees may start at $3 per standard lot traded and go higher as their liquidity gets deeper.
We can define the two common characteristics of all ECN brokers as raw spreads and costly commission fees. Nevertheless, True ECN Brokers also have to nurture a direct link to the market, i.e. connection to a network of liquidity providers.
Raw spreads and commission fees can actually be applied by any broker, even when they do not maintain deep liquidity and a direct link to the market. This is where "ECN Brokers" differ from "True ECN Brokers".
Characteristics of a True ECN Broker
True ECN Brokers should take on the role of intermediaries by transferring prices from the real market, rather than simply inventing variable spreads and calling them "raw". We may never know everything that goes on behind the scenes, but we can deduce two distinct characteristics of true ECN brokers: licenses from trustworthy regulatory agencies and connections to a network of liquidity providers -- not necessarily tier-1, but the higher the tier, the better.
Tier-1 regulatory agencies are organizations with the most stringent financial market supervision and, therefore, command high trust among forex traders. They are the Australian Securities & Investment Commission (ASIC), Investment Industry Regulatory Organization of Canada (IIROC), Central Bank of Ireland (CBI), Japanese Financial Services Authority (JFSA), Monetary Authority of Singapore (MAS), New Zealand Financial Markets Authority (FMA), Swiss Financial Market Supervisory Authority (FINMA), United Kingdom Financial Conduct Authority (FCA), and United States Commodity Futures Trading Commission (CFTC).
Tier-1 liquidity providers are big banks, prime brokers, and corporations that trade currencies directly in the interbank market. Some examples are ABN Amro, JP Morgan, Deutsche Bank, Credit Suisse, Morgan Stanley, Citibank, UBS, Barclays Capital, Nomura, Dukascopy, Venture Liquidity Providers Inc, Citadel Securities, and many others.
Forex brokers may shy away from fully disclosing the list of their liquidity providers, as it is considered a highly confidential information in the industry. Even so, qualified True ECN Brokers have to provide some information in order to gain public's confidence.
If you specifically look for ECN brokers with cheap pricing, you may want to check "Where to Find ECN Accounts with Low Commissions".