As Forex trading in this period has more requirements by traders than in the past (single liquidity provider "LP" model), ECNs are considered the real future of Forex trading for the retail and institutional community. These new requirements include tight spreads, deep liquidity, price transparency and anonymity in execution, low slippage and last but definitely not least, low latency. It's hard to fulfill by the classic Forex trading all of these requirements when taking into consideration that each Forex trader has his own needs regarding price and execution.
That's why ECN technology became so important for a Forex broker, as it enables the broker to aggregate its LPs, creating an order book and providing a best bid best offer to its traders. Broker's price competition between the LPs is greatly enhanced by its overall traders count which also provides the leverage to demand better execution. While this is taking place, the ECN enables liquidity efficient flow between price markers and price takers, so that the traders needs can be met creating the best environment suitable for the modern day trader.
To better understand this concept, we will take a perfect broker example that applies the True ECN pricing on all types of its accounts; it's IC Markets. This enables the trader to have direct access to its interbank prices feeds from over 50 different bank and dark pool liquidity providers to benefit from the best available prices from them.
ECN stands for electronic communications network. This is the technology by which price makers can send executable streaming prices (ESPs, also known as bids and offers) to the market, creating a virtual order book in such away that to a great extent mimic a stock exchange fashion. Any participant of that ECN with a liquidity to offer as a bid or offer is considered a price maker. With IC Markets, Tier-1 banks are among its price makers, so it can offer extremely deep liquidity with some of the best top of book pricing (spreads) in the world.
ECN model generates a price competition that is its most important feature. IC Markets and other True ECN brokers will produce more volume via the ECN, promoting more aggressive pricing by LPs competing for the flow.
The perse liquidity mix that prices into the ECN creates the volume centric ECN model that best achieves such competition. Up to 50 different LPs form the IC Markets liquidity mix including tier-1 banks, non-bank LPs as dark pools, other ECNs and aggregators.
With IC Markets as a perfect True ECN broker, traders can be filled on trade sizes starting from 1 micro lot (1,000 base currency) to 200 lots (20 million base currency) where prices are sorted and ranked allowing real-time execution of high volume Forex trades via multiple liquidity providers and their pricing tiers to ensure the best price for any trade size.
Another important key feature of ECN Forex trading is the anonymity of trader's orders and trades especially when a system / intellectual property is involved in trading and is needed tom be protected by the trader. IC Markets traders orders and trades are not disclosed to its LPs but held locally n the broker's Forex trading servers.
Forex ECN brokers have the priority for performance improvements to attract more traders and volumes. The most important challenge for ECN brokers is the low latency trading to fill traders orders in the least possible period of time. It's now ordinary to have an average execution time for Forex and Metals (ECN products) of under 40 ms. By that low execution time, HFT / Algorithmic traders benefit the most where one millisecond can make difference.
True ECN is what makes IC Markets on the top of the race. A deep and perse mix of up to 50 liquidity providers are connected to IC Markets True ECN traders for the best spreads and superior execution.