Every market player using the ECN technology to open/close a position needs to pay a commission for each trade. The ECN fee can be paid in one or several directions, depending upon whether a trade is opened or both opened and concluded. Some ECN companies charge a flat fee and some others offer a fee based on the assets being traded. Some of the market participants pay the commission directly to the ECN; others pay the broker indirectly through the ECN. This is done because of differences in the technology, the strategies followed and the needs of each participant. All these factors have an impact on the ECN fee that is paid to the broker for facilitating the trade.
The type of commission that is paid to the broker and ECN depends upon the rules and regulations of the particular market in which the ECN broker operates. It is a widely accepted fact that the price for trading in the US dollar currency market is based on the spread. The spread is the difference between the asking price of a currency and the bid price. The ECN broker pays the market maker for introducing the spread.
Brokerages that have a high number of traders or have a lot of customers usually charge higher rates for their services than those with few users. For instance, a large number of FX brokers will have the ECN as one of their features, but they will charge more for this feature, since their customer base will increase. A true broker on the other hand will offer only variable spreads to its customers.
There are several global liquidity providers that provide a discount rate to ECN brokers. These rates are usually much lower than the true market rates. This is done to attract more clients. These brokers earn a profit from the commission of the trader who requests the discount rate.
However, not all of these global liquidity providers provide a discount rate to ECN brokers. Some even charge them a fee for introducing the spread. The fees are also determined by the type of trading that takes place between the forex market participants. Some forex market participants can request a spread on any currency pair. These include speculators, dealers, and global cash manager account traders.
Other forex market participants may choose to trade only a few specific currencies. For instance, a trader may only want to trade in the EUR/USD or the GBP/JPY pair. If a trader requests a specific spread, he will be directed to a specific broker for that pair.
ECN brokers can also provide assistance to smaller traders who cannot afford to pay the full cost of introducing the spread themselves. In most cases, the ECN broker will offer assistance to brokers who do not have the capacity to pay the full amount up-front. This is done through "market makers" - brokers that agree to place a stop loss for the spread as soon as there is a gain or loss in the market. The ECN liquidity providers act as intermediaries for this. The ECN liquidity providers make money from the fees paid by the market makers.
When placing orders, the trader will have to specify the stop loss amount and the target limit price. The ECN broker will then break up the trades into multiple transactions for a maximum of ten thousand dollars. A small loss on the single trade will be offset by the larger number of trades. It is the ECN broker's responsibility to determine if the trades are profitable for the trader and his broker ECN liquidity provider.