ECN is the acronym for Electronic Communications Network. This term is often used in financial circles to represent a type of computer system that facilitates the trading of financial products outside of stock exchanges. Currencies and stocks are the main products that are traded on ECNs. ECNs came into being in 1998 when the SEC sanctioned their conception. The SEC stands for the United States Securities and Exchange Commission, an independent agency of the United States Government. This body has the chief responsibility for regulating the securities industry and implementing the federal laws, the nations stock and options exchanges and other electronic securities markets.
ECNs lower transaction costs thereby increasing competition among firms that trade. Additionally clients have full access to their order books and ECN tenders order matching outside of conventional exchange hours.
Persons who wish to trade with an ECN must get enlisted as a subscriber or have an active account with a broker that is able to give direct access trading. Orders may be inputted via a custom network protocols or computer terminal on ECN. Contra –side orders are then matched by ECN for execution. A sell order is classified as a contra – side to a buy – order with the same price and share count. All unmatched orders will then be posted for viewing by other subscribers by ECN. Usually all buyers and sellers are not known, the trade execution will list the ECN as the party.
There are some ECNs that may offer additional features to subscribers such as reserve size, pegging, and negotiation. Subscribers may also have access to the entire ECN book which has all the vital real time market information they need for depth of trading interest.
With the emergence of electronic trading venues such Electronic Communications Networks, individual investors were better able to trade after hours. Theoretically investors, regardless of who they are, and once they have access to an electronic communications network, are able to trade in the after hours market place.
Anyone wishing to participate in the after hours trading sessions must be affiliated with a brokerage firm that has an ECN or has access to one or more ECNs. The following are examples of ECNs
There are some ECNs that are legalized exchanges while others are minor broker – dealers and others are not legal. This is very important to note and understand.
The fee structure of an ECN can be grouped into two basic structures which have advantages unique to both these are:
Classic Structure – This structure usually entice liquidity removers
Credit Structure or rebate structure – This structure attracts liquidity providers.
Both are relevant in the creation of a market, hence it is vital that ECNs select their fee structures with extreme care.