Direct investment by ECN brokers
Forex is a very interesting market, much different from the conventional markets that we come across. It requires more intelligence, hard work and patience to gradually master the markets which in itself is not a very easy process. Great deal of analysis and constant reading and updating ones knowledge about the market and the evolving economy is a very major aspect required by the forex market.
Types of brokers
Like our conventional market, we have brokers and traders in forex also. Generally we have 3 types of brokers:
- Free market broker
ECN stand for Electronic Communication Network broker. These brokers help you by directly investing in the forex market by weeding out the middlemen. This ensures that your investment gets right through to the market without getting side tracked.
Commission, activity and features
One of the major differences from an ECN broker compared to others is that an ECN broker does not take a commission from the transaction. Instead he takes something known as pips. Pip is a term which is commonly used in the forex market. For example, if you are trading in a currency and you decide to purchase it at a higher cost, then you increase the pip, in case you want to purchase at a lower cost, you lower the pip.
Taking a hypothetical example to explain how this works. Assuming there is a currency you want to purchase, for 0.3 pips, the ECN broker will charge the transaction as 0.5 pips thus making a commission of 0.2 pips across the transaction.
But the major disadvantage being faced by an ordinary investor, who is trying to invest through an ECN broker, is the huge amount of initial investment required. ECN brokers are generally used for high volume and bulk transactions. Due to the limited commission involved, it makes more sense for ECN brokers to deal only with the big fishes who are willing to put in large sum of money. Most of the ECN brokers require a minimum of 50,000$ as a start up investment. Whereas with retail brokers, you can get benefit of trading on trial basis in order to be acquainted with the market or they can also provide you with small packages wherein you can trade on smaller level. But, unlike others, ECN brokers cannot manipulate the market to much degree. Simply put, they act as a conduit for you to invest in foreign exchange. They don't control the spread, leverage or any other such derivative. They buy or sell the foreign exchange at the prevailing market rate and take their commission.
In general practice, one item to be taken care of is that your broker should be SEC approved. Most of the forex brokers employed by private clearing houses or banks are generally SEC approved, but one should beware of various independent sharks posing as genuine brokers just waiting to make off with your money! Always go for established clearing houses or private firms who are sure what they are doing.