WHAT IS AN ECN ACCOUNT/BROKER?
This is my current investigation. I am trying to understand if it's any different than a regular account at a broker like IB.
[...researching...]
http://www.investopedia.com/terms/e/ecn.asp
http://www.sec.gov/answers/ecn.htm
http://en.wikipedia.org/wiki/Electronic_communication_network
http://www.elitetrader.com/vb/showthread.php?s=&threadid=174828&highlight=ecn
It's not clear at all to me whether all online brokers are ECN or not. Is IB an ECN? If they all are, then why do we have this distinction? Maybe... is the term being misused as often happens with trading, or with several meanings? What about fastbrokers.com, are they ECN? Who are they? A friend told me about them and their "microlots". I know nothing about this world.
What the hell is ECN? Is it just a synonym for online broker? Am I missing out on something?
[...researching...]
Ok... getting there...!
http://forums.babypips.com/newbie-island/8233-what-ecn-trading.html
ECN stands for Electronic Communications Network. Essentially you are trading with the real market rather than a market maker. Beware that some brokers that claim to be ECN are not. You can tell if one is because you will need a significant stake (50,000 US for Dukascopy) and you can only trade full lots (min 250,000 with 'the Duke')
Mmh... still quite unclear. If the stake was so high there wouldn't be so many people talking about ECN, so maybe the term is used in a different way than described in the quoted post.
Now this next post I am quoting, from the same forum, is also very interesting and informative, but it doesn't clear things yet.
Most people use "bucket shop" or dealing desk brokers. Here you pay a spread and the broker sets up the prices for you - you are not trading in the real interbank world but in the broker's own price world which is different from the interbank price world.
Your order is warehoused together with all the other orders and your broker sets up the prices you buy or sell at.
The broker gets his profits by charging you a spread - usually around 3/4 pips for the 4 majors, higher for exotic currencies.
The bucket shop brokers can play tricks on you :
-freeze your internet connection.
-reject your order and offer you a new on (at a loss to you) "requoting".
-trade against you and chase after your stop loss setting.
-email you to tell you that your profit trades were invalid.
-take money out of your account for all sorts of things.
-and much more.
An ECN broker is considerably more honest. He charges you a genuine commission that is taken from your funds. The pips then are all yours (sometimes charged 1 pip).
But the big thing with an ECN is that your trade directly with the interbank market and not in some broker's artificial world. you see the bids and asks and you can operate directly on these.
Maybe fastbrokers.com is a "bucket shop", as described above. Maybe just one that doesn't play tricks. But is InteractiveBrokers an ECN? Not clear at all. I know more, but I don't know for sure. I know more about what could be the case, but I don't know what
is the case.
More here:
http://www.elitetrader.com/vb/showthread.php?s=&postid=1910221&highlight=ecn#post1910221
Has anyone compiled a list of retail Forex Brokers that are ECN (as opposed to FCM Dealing).
Far too many acronyms get used in English, damn lazy *******s. However, from the link above I found this link:
http://www.forexfactory.com/showthread.php?t=53466
The first post at the link above lists InteractiveBrokers as an ECN.
Ok... this is good... my understanding of the matter is going further and further with this link:
http://www.online-currency-forex-trading.com/forex-broker-comparison.html
Ok, great. Now the above link officially states clearly enough that InteractiveBrokers is indeed an ECN. And ECN in this case is not intended as it was meant by the post above, that I will re-quote here:
http://forums.babypips.com/newbie-island/8233-what-ecn-trading.html
ECN stands for Electronic Communications Network. Essentially you are trading with the real market rather than a market maker. Beware that some brokers that claim to be ECN are not. You can tell if one is because you will need a significant stake (50,000 US for Dukascopy) and you can only trade full lots (min 250,000 with 'the Duke')
Ok, this is good... actually the best so far.
http://www.goforex.net/forex-basics.htm
Quoting from that last link:
Forex ECN Broker
ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers into the platform and have their trades filled by multiple liquidity providers in an anonymous trading environment. The trades are done in the name of your ECN broker, thereby providing you with complete anonymity. A trader might have their buy order filled by liquidity provider "A", and close the same order against liquidity provider "B", or have their trade matched internally by the bid or offer of another trader. The best bid and offer is displayed to the trader along with the market depth which is the combined volume available at each price. A greater number of marketplace participants providing pricing to the ECN broker leads to tighter spreads. ECN's typically charge a small fee for matching trades between their clients and liquidity providers.
Unfortunately, I haven't come to a good enough understanding of this matter but I have to put it on hold. For now it would seem that InteractiveBrokers could qualify as "ECN" and FastBrokers.com could qualify as "Bucket shop". I really liked the idea of microlots and wanted to open an account with them, but now I am afraid they will charge me for some bogus reason and steal my money.
MORE ON "BUCKET SHOPS" (OFF-EXCHANGE TRADING)
This is what their conditions look like (pretty clear and straightforward I have to admit):
http://fastbrokersfx.com/accounts/minifx.php
It is not necessarily an illegal or something like that. The NFA has produced this booklet about it:
http://www.nfa.futures.org/investor/forex/forex.pdf
Foreign currency exchange rates may be traded in one of three ways:
1. On an exchange that is regulated by the Commodity Futures Trading Commission (CFTC). For example, the
Chicago Mercantile Exchange offers forex futures and options on futures products. Exchange-traded forex futures and options provide their users with a liquid, secondary market for contracts with a set unit size, a fixed expiration date and centralized clearing.
2. On an exchange that is regulated by the Securities and Exchange Commission (SEC). For example, the
Philadelphia Stock Exchange offers options on currencies (i.e., the right but not the obligation to buy or sell a
currency at a specific rate within a specified time). Exchange-traded options on currencies have characteristics
similar to exchange-traded futures and options (e.g., a liquid, secondary market with a set size, a fixed expiration date and centralized clearing).
3. In the off-exchange, also called the over-the-counter (OTC), market. A retail customer trades directly with a
counterparty and there is no exchange or central clearing house to support the transaction. Off-exchange trading is subject to limited regulatory oversight. This brochure focuses on the off-exchange foreign currency market.
This is the key finding of my whole research: "
Off-exchange trading is subject to limited regulatory oversight". "Limited oversight", that could lead to some illegal stuff happening. Good enough.
Let's stay out of it.
You are relying on the dealer’s creditworthiness and reputation
Retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and do not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account are not protected if the dealer
goes bankrupt.
There is no central marketplace
Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace with many buyers and sellers. The forex dealer determines the execution price, so you are relying on the dealer’s integrity for a fair price.
You could be a victim of fraud
As with any investment, you should protect yourself from fraud. Beware of investment schemes that promise significant returns with little risk. You should take a close and cautious look at the investment offer itself and continue to monitor any investment you do make.
ABORTED MARTINGALE TRADING WITH FASTBROKERS
Originally I thought I might open an account with these fastbrokers people because my friend told me he has one and he trades "microlots" with them. That would have allowed me to trade a martingale system that I think is infallible. When it's fallen a lot, or risen a lot, you bet on a reversal. And if it keeps on falling, you just keep on doubling up. That system can't fail. But the problem is that I cannot trust these brokers with my money. Usually you just deal with the markets, but with off-exchange trading, you also have to deal with these guys and their spread, and other uncertainties. It would be almost like going back to trading options, which made me lose 100% of my capital every month in my first few years of trading.
Interactive Brokers offer ECN forex, and Nasdaq. So they do offer ECN markets, but as a broker; they offer a range of services, not limited to just ECN.
