I am always amused when I read trading forums and the resounding theme is that that brokers are crooks.  While, it may be true that some companies are chop shops, the majority of the larger firms are likely providing an honest service.  The excitement for retail trades moving over from equities to forex was the lure of commission free trading.  Granted there is a spread it is a nice perk.  However, just over a year after the first wave of traders get accustomed to the foreign exchange some companies began offering an ECN trading gateway.

The implementation stemmed from retrial traders frustration with wide trading spreads.  The truth is that the wider a company holds a spread the more it does eat into trading profits.  A general spread on the EUR/USD from a reputable broker is 2 pips.  The allure of the ECN is that the spreads are not fixed and traders can get on the bid and ask just like in the stock market.  The ECN can actually trade with a spread as narrow at ½ pip.  This sounds great to any trader that now their spreads are smaller and their profits will increase.  However, there are two major problems with jumping on the ECN bandwagon.  First, ECN brokers are not making any money now on the spread so they must charge a commission.  The commission is reasonable and generally equates to an added 1 to 2 pips per trade.  Lets use the best case example of the commission at a cost of 1 pip.  ECN spreads are not guaranteed.  Many people complain about spreads being fixed at 2 or 3 pips, yet sometimes this is a blessing.  An ECN can trade as low at ½ a pip, but can move up to any level.  In a fast moving market the spread could be over 5 pips.  If you already have a commission of 1 pip and the spread is 2 pips.  Now you are actually paying more than your original broker with a fixed spread of 2 pips.  There are advantages to the ECN.  Most importantly, with the open market and multiple liquidity providers it can give you a better feel of the true market price.  This may well be worth the1 pip commission.

In closing it is important to know the difference between a broker with fixed spreads and a broker with an ECN charging commissions.  I believe that they are suited for different types of traders.  It is important to review your trading strategy and select a broker with the plan that best suites your trading style.