What are the benefits of ECN trading?

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Johan's picture
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What are the benefits of ECN trading?

About ECN trading

Almost all traders know that it is practice of trading with an ECN broker. ECN brokers are one of the two types of the brokers that facilitate retail traders to penetrate the large interbank market.

ECN stands for Electronic Communication Network that allows traders to participate in foreign exchange trading. Contrary to market makers, ECN brokerage firms are managed through computer software.

Working with an ECN broker can benefit traders in multiple ways.

It allows traders to keep their anonymity and protect confidentiality of their transactions. Unlike market makers, ECN brokers do not dictate prices. They take prices from market participants including market makers and banks, take the best bid/ask quote and display it on their trading platforms.

Instead of capitalizing on spread, it charges a fix commission on every transaction. On ECN platform, we the traders are even allowed to set our own spreads and limits. This way we can also act as a market maker. On setting a spread, the ECN broker will search for a participant with a matching bid and hence facilitate the transaction.

As a matter of fact, ECN accounts are of special advantage to the scalpers and short term traders because of low spreads and fast execution of order due to direct dealing with market participants (large institutions).

Knowing all this, some sources on web still mention some negative aspects of ECN trading.

The question now is should ECN trading be preferred or not?

What are its negative points?

Is there any better alternative to this type of trading?

What is the best benefit this trading can give and what worst can it do with a trader?

Looking for the answers of these and expecting forum members to give their opinion on ECN trading.