What is an ECN broker in Forex - ECN vs exchange - YouTube

in this video I'll answer the question what is an  ECM broker in the forex markets well in ecn broker  

for starters stands for electronic communication  network so really what happens is in the Forex  

world there are a couple of different ways that  trades happen in one example and this is the  

oldest model there is a group of money and this is  represented by your broker and this is all of the  

clients and the money that they have and trader a  will place a trade and on the other side of that  

trade is the broker now they'll charge a flat tip  spread say 3 pips for you know say your trading I  

don't know like euro yen or or impound yen and  it's a 3 pip spread in this environment this is  

called a market maker and the broker is trading  against you so what I mean by that is doesn't  

necessarily mean they're doing anything nefarious  but as you make money they lose money they click  

the 3 pips regardless as payment the spread and  then you know if you win $10 then they're down $10  

minus the 3 pip spread now that was the model  for ages and this is called a market maker so  

I'll just put in mmm there now there is straight  through processing and they use what is known as  

a liquidity pool which a nice en also uses and  this would be your broker here and this would be  

broker to broker 3 broker 4 so what they have  here is a liquidity pool that's where a bunch  

of money gets thrown in and all these brokers  are connected to it including yours the trader  

a takes a trade the broker sends it out there  they pay the three pip spread the real spread  

is something only the broker knows and in this  environment depending on what's going on in the  

market it might be very tight it might be 0.4  pips so what happens is in this case the broker  

makes 2.6 pips regardless what happens with your  money furthermore they do not lose money based  

upon what you're doing so if you're down $50  they aren't up $50 just like if you make $50  

they aren't down $50 they keep the 2.6 spread  now an EC n is a bit different it's it's a lot  

like this in its structure but the difference  here is you have the liquidity pool where all  

of the money is stored and you'll have several  brokers so these are a bunch of brokers and this  

is your brokerage firm right here that you're  trading with and you place a trade and what they  

do is in this same example up here if the spread  is point four pips they'll show point four pips  

and your trade is thrown in here and in both of  these you could win or lose and it will match an  

order maybe let's just say it comes from broker  two in both scenarios so you're trading against  

some trader over here you don't know who it  is doesn't really matter you buy ten thousand  

pounds against the Japanese yen they're trying to  sell ten thousand pounds against the Japanese yen  

and your order gets matched up the difference  between the bid and the ask is 4/10 of a pip  

so there that's where you're at now what happens  here in the ecn is this broker has a predetermined  

price and it'll be plainly known it might be  like three dollars per every hundred thousand

units trade like a full lot so in this case  we're trading a tenth of a lot so you would  

play or you would pay four tenths spread plus  the commission of in that case it would be you  

know roughly thirty three cents your broker keeps  that doesn't matter what happens here so instead  

of padding what the actual spread is they make  the difference in error they charge a specific  

amount of commission now ask yourself what's  the advantage and disadvantage for the broker  

here well the advantage for the broker over here  is under most circumstances this spread is going  

to be about this and they know that and don't  get anywhere from like two to six two point six  

two point four two point seven whatever on a  consistent basis however there are times where  

they they started run into trouble here because  in a very illiquid market like at non-farm payroll  

maybe the spread jumps to seventeen pips well  for a while they were charging a flat rate and  

the problem is and some of them still do the  problem that they have there is you are buying  

but there are actually 15 pips almost 15 pips in  the hole immediately because of which you trade  

now most of the time you're gonna see conditions  like this but there was the occasional time when  

they were losing a bunch of money so in a nice en  environment they will just simply show you this  

same spread in that non-farm payroll and you can  choose whether or not you're going to trade it and  

they're gonna make their 33 cents or three dollars  and 33 cents per hundred thousand regardless of  

what this spread is and they don't care what  happens after that other than in this scenario  

they want you to be a client for longer they want  you to be successful because it means you'll be  

paying them more it's kind of like a stock market  broker a stock broker actually wants you to be  

successful so you keep paying for services it used  to be commissions as that's kind of going by the  

wayside in the u.s. probably going to follow suit  everywhere else but their interests are much more  

aligned with you with an easy end and you already  know your cause going in you make the decision  

whether or not you're willing to deal with the  17 pip spread which you know hint you should  

not be and then that way it protects them in this  scenario and this scenario here because those who  

are market makers quite often allow fixed spreads  so it'll always be three pips so they could take  

a loss even if they quote-unquote beat you so to  speak in that trade so a nice en is definitely the  

way to go probably 95% of the time doesn't mean  there's anything nefarious going on here it's  

just that this is where you and the broker are  aligned as far as your interests are concerned