The global currency exchange market involves individuals, companies, and banks who wish to sell and those who want to buy. Anyone can participate wherever they are using an online platform. The foreign exchange needs to be organized by the Trading Platform so that the professionals involved can benefit from it. Values and prices are constantly fluctuating, and professionals have to find ways to offer potential customers a more consistent way of pricing. Electronic communications network brokers are major players, and they make money by calculating rates depending on how the market is faring as well as the kind of trade their clients want to make.
Foreign Exchange ECN Brokers
ECN brokers are big market players and financial experts in foreign exchange who make use of electronic communications networks to give their customers direct access to other players in the currency markets. Professionals sell and buy foreign currencies for both themselves and their clients. These brokers deal directly with the inter-bank market, and they analyze pricing feeds and process their clients’ orders. They have nothing to do with the actual pricing formation. Instead, they simply match trades among participants in the market. They then merge the price quotations to offer their customers better bid-ask spreads in international currency trades. The prices, rates, and customer orders are done electronically. It is the foreign exchange market that determines the values for various currencies.
Brokers charge for the services they offer their clients, and this can include negotiations and transactions on their behalf. These professionals serve as middlemen between sellers and consumers, and they also give their clients advice and help in creating an investment portfolio. They take client preferences into consideration when handling transactions even if trade execution is instantaneous. Unlike foreign exchange market makers, ECN brokers do not fix their bid-ask spreads. The spreads are variable, transparent, and open. Instead, brokers look for the available price they believe is best. Sometimes, brokers do not charge for spreads at all because trade results do not really affect their financial standing. This is also why they do not feel the need to manipulate prices.
ECN Brokerage Fees
ECN brokers normally profit from a small spread rate, but the bulk of it comes from broker fees. This type of broker will almost always add a commission charge. They are normally paid for every transaction they make whether it is profitable or not. However, they have to earn clients’ trust and stay reliable. The more trades clients make, the more commissions ECN brokers gain. There is usually no trade limit set.
Brokerage fees are based on a predetermined pricing system that is used in foreign exchange trading. Even if ECN brokers do not explicitly charge for bid-ask spreads, it is already incorporated into the foreign exchange standard pricing system. In other words, it is the basis for calculating brokerage fees are calculated. Foreign exchange ECN brokers set their prices and fees in the form of a pip. This is the smallest change in price that a currency exchange rate can have. The quote for pips is set up to four decimal places, so the U.S. dollar pip could be set at $0.0001.
Calculating ECN Brokerage Fees
Every currency is traded in pairs because it involves both the sold currency and the purchased currency. The foreign exchange market will give the exchange rate for how much it will cost to buy one kind of currency with another. For example, it will take $1.53 to buy one British Pound Sterling. In pip terms, it would show as $1.5300 to get one British pound. Trades and spreads will also depend on the market available on currency orders or liquidity.
A bid-ask spread is determined using the currency the client wants to purchase and the currency the customer wants to buy it with. The bid will be the price the ECN broker will pay the clients for the currency they want, and the ask is the price the broker will sell them the currency for. An ask is usually a small number of pips greater than the bid, and this margin will mean a lot to both the broker and the client. A tighter spread will be more advantageous for clients.
To calculate the spread, deduct the bid price from the amount set for the ask. This spread will form the basis for brokerage fees. For example, if the asking price for British Pound Sterling is at $1.5300, and the bid at $1.5295, the broker’s share will be 5 pips. The spread is multiplied by the unit amount of currency sold or bought, so brokers would multiply $0.0005 by the total amount of British pounds sold. The product will be the spread the broker keeps as the brokerage fee. There are times during peak trading periods when there is no difference between the bid and ask prices. When this happens, the spread is at zero.
ECN brokers will normally have a separate charge for commission service whenever they close or open a trade. This is usually less than a pip, and it is solved the same way. The commission pip spread is multiplied by the total amount of currency sold or bought. To make their service more valuable for customers, some ECN brokers give clients access to superior software platforms. This makes the commission worth it.