To understand what is Account ECN, it would be necessary to understand what an Electronic Communications Network or ECN is. An electronic communications network is a group of networks that facilitate secure data transmission over the Internet. One can also refer to it as the computer network that includes intranet, extranet and the Internet itself. It is used by all the major banks, brokerage firms, software providers, telecom companies and even telecommunication operators. In simple terms, an ECN allows multiple communication networks to exchange and process customer applications without requiring expensive internal networks or wiring between end-users and the banks. Instead of incurring surcharges on top of the capital charges while using a credit card, the bank simply charges transaction fees when a payment is received.
A good example of how this works is provided by the credit card industry. If you go to your favorite credit card store and use your credit card to make a purchase, the bank simply reports the sale to the network and you are billed for the full amount. Your financial institution then pays the merchant company for the sale. However, if you prefer cash payment, say you prefer to pay by check, your financial institution may not allow you to cash a check. In such cases, the merchant company does not incur any extra monetary charges but you will have the option of selling your check to another buyer who will accept the check and issue you a check minus the bank’s commission.
In contrast to the above-mentioned scenario, where the bank facilitates the transaction and the financial institution absorbs its commission, an account ECN facilitates the exchange of financial instruments between entities who are willing to transact or do business together. The exchange is done directly between the parties, without the intervention of the third-party financial facilitator. This is in fact a more preferable arrangement as the ECN helps minimize and eliminate the third-party cost. In other words, an account ECN allows for real economic exchange to take place between the parties in real time without the need of third-party facilitators. Since real-time financial exchange is beneficial to both the seller and buyer, the rate of commission charged on ECDs is generally low.
There are two types of account ECN – an inter-bank direct trading account and a hosted trading account. An inter-bank direct trading account is between two banks with direct access to each other. As such, one account holder may be allowed to transact in another account, while the other is not. Typically, this is a unisex type of account that charges the same rate whether the buyer or seller is a bank.
On the other hand, hosted trading accounts are web-based brokerage firm’s websites. If you wish to open an account with a particular firm online, you are required to create an account with them. Once created, the broker provides you with a login and password to access your account. There are currently a large number of online brokerage firms and each one offers different account types. Most brokerages offer three account types which are – the discount trading brokerage, the investment grade trading brokerage and the unlimited trading brokerage.
Another factor that affects the rates of exchange is the country in which the account is opened. Different countries have their own trading restrictions and regulations. In most cases, the discount brokerage firm is restricted to trading in a few currencies. Therefore, they tend to give high rates for trading in only a few currencies. Whereas the investment grade brokerage firms are able to trade in all major currencies and also have more freedom in choosing which currencies they want to trade.
The discount trading firm offers lower rates due to the nature of the business. The trader does not need to buy or sell large amounts of currency in a short duration. Since the trader needs to execute trades quickly, he requires lower rates. However, since he executes trades using smaller amounts, he is able to pay out higher commissions. The investment grade brokerage on the other hand, would allow the trader to make better use of his money and pay lower rates for trading.
Before making a choice between the discount and investment grade, the trader needs to consider the kind of account he needs. The discount account allows the trader to invest small amounts and gain access to low rates of exchange. The investment grade trading firm on the other hand is meant for those who want to make larger profits by making better use of larger amounts of currency. Since the rates of different currencies change frequently, the investor should choose the account types that offer the best rates. A broker may be able to help determine what account type would suit his needs.