what is ecn broker

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Joined: Mon Nov 06, 2017 2:04 am

what is ecn broker

Postby Josesv » Mon Dec 04, 2017 3:09 am

Let's start by looking at how Alpari arranged things in the "old days". In order to hedge client trades, we opened accounts with other, larger brokers, deposited money and hedged our clients' trades at the best prices we could. But this system is replete with drawbacks: first of all you have to open accounts with a lot of different brokers. That in and of itself isn't the difficult part. But then you have sufficiently fund all your accounts because you never know what volume you will need with which broker. Of course you can move money around among your various accounts but this takes time and is not cost effective. And most critically, it's slow – a serious concern when hedging trades. The next problem is that even if we manage to open a position at a good price, we will have to close the position with the same broker with no guarantee that a good price will be available when the time comes to close the position.

what is ecn broker?
In Europe and the US, the world of finance realized the inefficiency of such a system and developed a model that's called "prime brokerage". We will take a look at the UK as an example of how this works. Let's assume there's a bank which is considered a prime broker (generally only major banks, though some second echelon banks). Alpari goes to this bank to open a prime brokerage account. Before opening such an account, however, the bank will want to know if the company has a license to offer brokerage services. In our case, Alpari offices in the UK and US can show licenses from the FSA and NFA respectively. Needless to say, licenses from various island enclaves and other unrecognized authorities will not pass muster here. This is the first filter and not every company makes it through. Next the bank will be interested in the approximate trading volume the company can achieve; banks aren't interested in going through the trouble of opening an account if it won't be generating a steady flow of commissions from the company. Low-volume companies are either rejected immediately or have their accounts closed when it becomes apparent the company's actual trading volume falls well short of expectations. Trading volume, the second filter for prospective companies, implies a client base sufficiently large to reach the necessary volumes. Generally speaking, we're talking about volumes of billions of dollars a month.

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