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A distinct type of broker that often raises confusion amongst traders is the ECN broker. ECN, or Electronic Communications Network brokers are a hybrid provider, creating in and of themselves a mini-market for the relevant trades to take place. Designed to increase competition and allow better pricing with tighter spreads, ECN brokers could be seen as something of a cross between DMA and MM brokers, insofar as they are providing a highly liquid albeit artificial market in which traders can participate. But what advantages do ECN brokers hold over their competition, and is it worthwhile making the switch to an ECN broker with your trading account?

What Is ECN?

ECN is effectively an electronic system that brings together multiple traders to match their trading positions. Where in traditional MM brokers, the transaction is made directly with the broker, or where the trade is executed in the 'real' markets directly as with DMA brokers, ECN brokers match up traders to corresponding positions, and profit only from a commission proportion placed on each transaction. Thus, ECN brokers are effectively making markets in miniature, in the sense that they are combining traders on both sides of the table to match transactions for better all-round trader value.

The first point that becomes obvious about ECN brokers is that they are not engaging in direct competition with your position. ECN brokers recognise that every transaction needs a winner and a loser, and they take no part of that deal - they simply bring together the counterparties and allow the transaction to happen. This allows you to be sure you're getting the best deal on your transaction, given that you're not being quoted by a party with a strong vested interest in the outcome of the trade.

Secondly, because you a trading directly and paying a commission to the broker, you tend to be quoted better spreads, often as low as zero on the transaction. This is because you are dealing with an actual, vested counterparty rather than a broker, thus you are more suitably positioned to get the best price on a particular trade.

The Drawbacks

But it's not all rosy with ECN brokers. For starters, you tend to be required to be trading on a larger scale in order to gain access to their services, and their platforms are more often than not cumbersome and comparatively difficult to use. Furthermore, with commission payable on every single transaction placed and leverage at a lesser proportion than with retail brokers, the costs of trading with an ECN broker can quickly mount up and prove more significant that with a regular broker.

ECN brokers do provide an in-demand service, and for the more serious trader they are certainly a consideration. Heightened volatility and lower spreads, matched with an improved market transparency make ECN brokers uniquely positioned to meet the needs of certain traders, and with a review of the pros and cons and how they apply to your trading situation, the more exclusive ECN broker might turn out to be the best option for your trading needs.