- Various Models of Forex Order Execution
- Orders are automatically matched with ECN
- ECN trading’s advantage is the transparency
- STP FX brokers counter orders
- 2 Order Execution Methods
- Advantages and disadvantages of each ordering method
- 3 Best ECN Forex Brokers
Various Models of Forex Order Execution
There are Forex brokers which are operated by the “Dealing Desk (DD) method” and the “No Dealing Desk (NDD) method” which is adopted by most FX brokers in these years.
The no dealing desk method is more advantageous for traders.
However, even if the no dealing desk method is adopted, there are two ordering methods, the “ECN method” and the “STP method”.
We will explain the differences between these order execution methods and the advantages and disadvantages of each method.
Orders are automatically matched with ECN
The ECN is a name derived from the initials of “Electronic Communications Network”, also in the United States there is a private trading system that allows electronic trading of financial products, and that exchange is called “ECN”.
So to speak, “an ordering method in which you exchange money directly by connecting to a private exchange called ECN” has become a standard among online brokers in these years.
In this ECN environment, not only individual traders but also orders of hedge funds, FX brokers, securities companies, banks, and other “Liquidity Providers” are constantly matched, and trading environment is established.
Also, each participant’s order will be added as “Market Depth” board information.
By referring to the “Market Depth” board information, you can refer to “how much price and how many orders have been placed at which price” in real time.
The ECN condition of matching is an auction format.
If the buy and sell orders match, the orders are immediately matched and filled by the system.
As a characteristic of the ECN auction, if there is a counter order (buy order) corresponding to your sell order, it will be matched immediately, but conversely, if the total number of counter orders to your order is small, you may not be able to execute the orders and the orders may not settle.
However, in the ECN method, since a large number of trading groups are participating, the trading volume is automatically referred from a huge number of orders, and therefore the execution power is very high.
Also, the spread is not always the smallest and slippage may occur, but the requote does not occur.
Therefore, the advantage of the ECN method is that you can trade stably.
ECN trading’s advantage is the transparency
Forex brokers that use the ECN method collect fees according to the trading volume.
Since ECN brokers do not add fees to raw spreads, the transparency of that transaction is also an attraction for the ECN method.
However, there is a demerit that liquidity (trading volume) above a certain level must be secured to obtain sufficient contract power.
Therefore, it may not be filled when the market volume is thin or in the case of a minor/exotic currency pair.
Also, for FX brokers that use the ECN method, the required initial deposit is often set higher.
Therefore, it may be a disadvantage for those who want to trade FX with small amount.
STP FX brokers counter orders
The STP is an ordering method named after the initials of “Straight Through Processing”, in other words, “orders flow directly to the market”.
For FX brokers that use this STP ordering method, the rate of the main financial institution (liquidity providers) is referenced, and the spread is added to the rate and presented to the trader.
In this way, with the STP method, the difference between the offer rate from the liquidity providers and the offer rate to the trader is the profit of the FX broker.
In the case of an STP FX broker, when brokers receive an order from a trader, they will swallow (settlement) it once.
After that, the broker will place an order to the liquidity providers instantly, but depending on the rate, there may be a loss in the FX broker at that moment.
However, since the broker side does not want to lose, re-quotes may occur if the rate provided by the trader isn’t fair at the moment.
2 Order Execution Methods
For STP brokers, there are two ordering methods, which are Instant Execution and Market Execution.
Instant Execution means executing orders immediately in the FX market.
When a trader places an order, the FX broker hedges (settles) it immediately, but no actual trading has taken place at this point.
After the trader swallows the order, it is sent to the financial institutions covered by the liquidity providers almost at the same time.
Instant Execution has a pair of terms, which is “Market Execution”.
The meaning of Market Execution is to do the opposite of Instant Execution.
In other words, it is an ordering method in which an FX broker does not swallow a trader’s order but directly places an order at a financial institution (liquidity provider).
By placing an order directly to the liquidity provider, no re-quote will occur, but if the order is not settled immediately, slippage may occur.
Also, some FX brokers that offer Market Execution provide an electronic system, “DMA (Direct Market Access)”, that allows traders to place orders at the market price of financial institutions.
If your FX broker provide the DMA trading environment, you can use a trading environment that is highly transparent because it is directly connected to the market and has almost no delay in execution.
However, due to the nature of the market, spreads are normally floating (variable).
For that reason, it can be said that DMA is not offered by FX brokers who provides fixed spreads condition.
Advantages and disadvantages of each ordering method
Many Forex brokers that use the STP method use Instant Execution as the execution method.
However, it is not that “Market Execution is superior to Instant Execution”, but each has advantages and disadvantages.
For example, with Instant Execution, small transactions are possible, so even beginners of FX can enjoy it.
However, it is better to use Market Execution when it is necessary to reliably settle orders when conducting large-scale transactions of such as one million currency units.
Market Execution also lowers the total cost of spreads and transaction fees, so the bigger the deal, the greater the benefits.
3 Best ECN Forex Brokers
Now, which Forex broker adopts ECN trading environment with the optimal conditions for traders?
According to Hercules.Finance’s experience and our traders’ reviews, we have determined 3 of the best ECN Forex brokers as below.
LMFX is a STP and ECN broker that allows any kinds of trading strategies on MT4 platforms. LMFX offers up to 1:1000 leverage, multiple bonus promotions and also trading conditions that suit for any types of traders.
XM is known as the largest MT4 broker, and also it is one of the most popular Forex broker in the world. There are many reasons to choose XM as your principal broker, and their unlimited trading platforms is one great reason for traders.
FBS is a friendly and professional Forex broker with 24/7 continuous customer support in multilanguage. Nonly only FBS provides ECN account type, but also gorgeous bonus promotions to increase your profit rate.
The above 3 ECN Forex brokers are the most popular choices of traders.
Have you tried these brokers to trade Forex and CFDs? If not, go to their official websites from above and open an account.