What is ECN Trading and How Can It Be Used to Your Advantage?

By Achal Arya
April 20, 2020 Updated July 24, 2020
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Image Courtesy of Reuters/Vasily Fedosenko

When it comes to bitcoin, it’s little wonder that this online currency is heavily reliant on technology to move from one place to another, nor that it has been utilized to give the small fish the ability to compete with larger financial institutions. 

As BTC was envisaged as “the currency of the people,” it seems only natural that there would be tools in place to create a more level playing field than many investors are used to – and one example of this is the increasing prevalence of electronic communications networks (ECNs) among bitcoin brokers.    

What is an ECN?

ECNs were first implemented in online forex trading. An ECN is a type of electronic trading network set up between market participants such as forex brokers, which provides access to an extensive liquidity pool. Designed to do away with any conflict of interest between trader and broker, it delivers real-time quotes and competitive spreads, to minimize the cost of trading.     

The snowballing popularity of ECNs means that, more than ever, it’s vital that traders pay careful attention when picking their broker. While this has always been an essential consideration as it affected the rates available and the trading conditions on offer, there is now an additional factor at play: whether your preferred broker is a market maker or an ECN.    

If you’re not familiar with these terms, allow us to explain. A market maker is exactly what it says on the tin: a broker who sets their own bid and ask prices via their internal systems and displays these on their platforms. What market makers will not do is hedge their client positions with alternate liquidity providers, instead opting to cover winning client positions from their own pockets. 

What this means is that when a market maker trader assumes a winning position, the former loses.   

With an ECN broker, on the other hand, traders are given direct access to other market participants and interbank trading prices. This allows each party – buyer and seller – to find someone who can counter their position, with the benefit to the trader being manifold: greater efficiency, improved transparency, more economical trading conditions, and more attractive prices.  

The upside for the broker, on the other hand, is that they will have a greater volume of clients trading with them, and as they’re able to charge a commission on each position, can continue to turn a profit irrespective of individual wins or losses. 

The upsides to trading with an ECN broker 

For those considering whether they’d be better off trading with an ECN broker or a more traditional outfit, there are no easy answers. Much of it comes down to personal preference and individual circumstance, but there are a few key factors you might want to take into consideration. 

First and foremost, many traders prefer that ECN brokers are not trading against their clients. As they act in the sole capacity of an intermediary, they don’t bet against you, which removes any perceived issues arising from this traditional conflict-of-interest scenario.   

In addition, this alternative business model reduces the need for price manipulation, while also ensuring enhanced transparency and preferable trading conditions. With traders having access to real-time information and clearer price history, it’s easier for traders to trade quickly and with confidence, and you’re likely to find that both fees and commissions are lower. 

To round this out, most ECN brokers are also able to provide 24-hour access to the markets, meaning you can trade as and when it suits your schedule, as opposed to somebody else’s. 

Allowing individuals to invest in bitcoin and other instruments in an arguably more efficient and lucrative manner than they’ve ever been able to before, ECN brokers are no doubt worth considering for those looking to refine their tactics and/or increase their profits.


Achal is an entrepreneur and a product designer with a bachelors degree in Computer Science. He works in the Web3 domain and manages new developments at Coingape. Follow him on Twitter at @arya_achal or reach him at achal[at]coingape.com.
The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.

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