Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

ECN Broker

What it is:

An ECN broker is a person who uses electronic communications networks to give clients access to buyers and sellers in the currency markets.

How it works (Example):

An ECN broker is sort of like a market maker for currency markets. The broker gathers bid and ask quotations from buyers and sellers and matches trades between them.

ECN brokers profit by charging a spread. A spread is the difference between a bid price (what someone is willing to pay for the security) and an ask price (what someone is willing to sell it for). The more participants an ECN broker attracts, the less it usually will charge (that is, it will usually have a smaller spread). For this reason, some ECN brokers simply charge fixed rates instead of percentage commissions.

Why it Matters:

ECNs are experts in currency markets who can connect small investors with large investors, such as major banks. The technology that links the two is called the FIX Protocol (Financial Information Exchange Protocol). The trading is anonymous and electronic, which lowers the cost, and it allows big institutions to trade with each other.  People can also get market feeds and other real-time information from ECN brokers, and they use that to feed their trading models and electronic trading systems so that they can react immediately to price changes in the currency markets. At the end of the day, however, currency prices are still determined by supply and demand.