ECN Trading

The introduction of the ECN technology has become a major landmark in Forex market history. It is often associated with a new era in Forex trading and has been significantly developed in that time. Regarding Forex market specifics – its decentralised structure and OTC trading - it is clear that the Electronic Communication Network (ECN) is the next logical step in Forex market evolution.  

ECN trading has enabled Forex participants to trade directly in the interbank market and make deals with other market agents who are free to introduce and display their own orders to others. If their prices match, the deal is successfully completed. This is achieved as a result of the order matching mechanism that guarantees automatic execution upon meeting such parameters as the type of a financial instrument, its price and quantity. Thus, the system is fully transparent and has positively affected public credibility in Forex. 

ECN trading provides “straight through processing” execution (STP) which is an essential characteristic of the ECN model, distinguishing it from a typical dealing centre. If there is no counterparty for an order, opened with an ECN broker, it goes directly to the bank where other financial organisations, hedge funds or major banks supply liquidity to execute an order. Due to a large number of external liquidity providers their competition gets stronger and an order is executed at the best available price.

The ECN/STP type of order execution is based on some general principles.

Limit Orders can be:

  • rejected;
  • filled fully or partially;
  • executed at the stated level or better, with the potential for positive slippage.

Market Orders can be:

  • rejected;
  • filled fully or partially;
  • executed at the stated level or with any slippage.

Thus, Market Orders may have both negative and positive slippage, while Limit Orders may be executed at the stated level or with the potential for positive slippage only.

In periods of low liquidity (e.g. at market opening or closing) as well as high volatility, triggered by the release of key economic news, Limit orders may not be executed at the set price. The ECN/STP model is associated with real advantages, among which are floating spreads, no re-quotes and market execution. The development of ECN/STP technology has created favourable conditions for the wide application of different trading strategies, such as scalping, news trading and algotrading. This has arguably contributed to the foundation of the specific ECN environment that is appreciated by the whole Forex community.

Read more on ECN/STP technology:
ECN – How it Fits in Forex
Breaking Stereotypes of ECN Brokers