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FxOpen: Are Floating ECN Spreads Better Than Fixed Ones?

06 June 09:00 AM

Electronic communication networks (ECN) are getting more and more popular around the globe, thus ousting the conventional broking scheme (Market Maker). Most experts are aware of this process and assume this is a natural process. The major peculiarity of trading through an ECN is that you trade in the genuine Forex trading environment. With an ECN broker, you make a deal directly with another market participant. Alternatively, a conventional Forex broker usually doesn’t put clients’ orders in the interbank at all.

However, numerous traders, who are used to trading with conventional brokers, consider ECN trading to have a major drawback - floating spreads. For example, an ECN broker usually offers a 0.2-0.3 pips spread for EURUSD. However, during major news, the spread may grow up to 2-3 pips.

So, let’s try to find out which kind of spreads is more beneficial for Forex traders? FxOpen (“Best ECN Broker 2012” according to Masterforex-V Academy’s rating of ECB brokers) will help us to answer this and some other questions.

More Traders Switch From Market Maker To ECN

According to Eugene Olkhovsky, Masterforex-V Academy’s leading expert in financial markets from Canada, these days. Most Western brokers provide ECN services. With an ECN, traders can:

· Get access to the genuine interbank liquidity

· Trade a wide range of assets

· Utilize automated trading technologies

· Trade without third parties

· Save on lower spreads and commissions

· Trade big (it depends on the current liquidity of a certain ECN)

· Enjoy instant execution of orders

Market Maker VS ECN: Which Is More Profitable?

These days, the ECN technology makes the real interbank Forex market available to both big-scale trading institutions operating substantial funds (like banks or investment funds etc.) and mid/small-scale individual traders who operate moderate trading capital.

Moreover, an ECN broker is universal as it is suitable for traders with any trading strategies and approaches, including the so-called scalping approach, which is banned by many conventional (Market Maker) brokers and dealing centers. ECN brokers allow automated trading as well. An ECN liquidity pool is formed by major international banks, hedge funds, big-scale financial institutions and companies.

According to FxOpen (“Best ECN Broker 2012” according to Masterforex-V Academy’s rating of ECB brokers), the major competitive edge of trading through an ECN is the possibility of saving on spreads and commissions.

To clarify the situation, first let’s look at the chart of FxOpen’s Standard Account specifications (fiхed spreads):

таблица

It looks pretty standard and clear, doesn’t it? However, when considering ECN floating spreads, it is necessary to consider several key factors. In particular, you need to know the average monthly spread. You can address the broker or to use independent monitoring sites. According to one of such independent sites, FxOpen objectively offers some of the lowest floating spreads in the industry:

Now let’s calculate the average monthly spread offered by FxOpen Company (as of April 2012):

таблица

Please, keep in mind that ECN brokers charge commissions: $1.8 - 2.5 per 1 standard trading lot, i.e. $3.6 – 5 for completing (opening and closing) a single trade equivalent to 1 standard lot.

Now let’s calculate how much you will pay the broker if you trade 10 to 50 standard lots a month.

Firstly, let’s assume that you have opened 2 trades: a 7-lot EURUSD one and a 3-lot GBPJPY one.

The formula for Market Maker (Standard):

7 EUR/USD lots х 2 pips ($20) + 3 GBP/JPY lots х 7 pips (roughly $70) = $140 for EUR/USD + $210 for GBP/JPY = $350.

The ECN formula:

7 EUR/USD lots х 0.33 pips ($3,3) + 7 EUR/USD lots х $5 (commission for opening and closing the trade) + 3 GBP/JPY lots х 0.9 pips + 3 GBP/JPY lots х $5 (commission) = $23 as EUR/USD spread + $35 as EUR/USD commission + $27 as GBP/JPY spread + $15 as GBP/JPY commission = $100.

That’s a huge difference!!! $350 vs $100.

Now let’s assume you have traded 50 standard lots this month:

20 for EURUSD, 5 for GBPJPY, 20 for GBPUSD and 5 for USDJPY.

To make the long story short, we use the same formulas to calculate the costs. And the difference is huge once again: $1450 vs $476! You save $974!!! Unbelievable!!! (You can calculate it yourself by using the given formulas and cahrts).

Comment is superfluous!

By the way, FxOpen has revolutionized the industry by combining the conventional MT4 trading platform and ECN/STP (Level 2 data) into ECN MT4 accounts.

FxOpen: More Advantages

According to Denis Peganov, a representative ofFxOpen, the floating spreads can be even tighter if you trade during European and American trading sessions. Moreover, one should forget about slippage, which is always an unpleasant surprise for those who trade with conventional “Market Maker” brokers. However, with FxOpen, slippage can be both negative and… positive (in your favor). If to consider the fact that FxOpen has introduced unique ECN trading technologies, the company’s clients always get the best offers from multiple liquidity providers.

Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:

Which spreads do you prefer, fixed or floating?

You are free to discuss this article here: forum for traders and investors

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