What is electronic communication network (ECN)?
A computerized system that automatically connects buyers with sellers through their orders for the same securities on the publicly traded markets is known as ECN or ‘electronic communication network’. Major brokerages are connected with individual traders so both can directly trade among themselves without having to go through a middle person. The electronic communication network makes it impossible to trade from differing locations, even when investors are on opposite ends of the globe. ECN makes trade quick and easy. quickly and easily trade with each other.
How does an ECN work?
Now that the question of ‘what is ECN’ has been addressed, let’s understand how it works. Traders connect via ECN, meaning those who are buying and selling the same stock are automatically matched through this portal. An ECN is any computer based system which displays the best ask and bid quotes from a number of market participants. The ECN will automatically match traders — one ask with one bid — and thereby execute orders. ECNs are used on major exchanges, foreign currency trading, or after-hours orders
ECN makes its money by charging a fee for every transaction so one can meet their financial obligations. The goal of ECN is to eliminate any third parties. Third parties such as brokers normally execute orders by fulfilling the role of an ECN and matching trader with trader.
The technical name for this role is known as a market maker on public exchanges or over-the-counter trades. Market makers match like traders together to ensure one’s orders are partially or entirely executed. Any and all orders that are placed through an ECN are usually limited. This is partially useful when one wants to safely trade after hours. Since stocks’ prices are so volatile, after hours trading offered by ECN adds a layer of security to one’s positions.
Who is an ECN for?
Hence, by using an electronic communication network, traders make trades outside the traditional trading hours. ECN provides a mechanism for those who cannot be actively involved during normal market hours. Additionally, they are also well loved by those who prefer flexibility in their trading time horizons. ECN also prevents wider spreads from occurring which is a common occurrence with traditional brokers, with overall lower fees and commissions. For those who are concerned about their privacy, ECN also offers a layer of security as privacy with regards to one’s trades. Investors who desire anonymity when making large transactions can use ECN.
How to Trade Using ECN?
If you wish to trade using an ECN, you simply need to have an account or be a subscriber with a broker who offers its customers direct access trading. Using a custom computer terminal or network protocol, any subscriber can enter orders into the relevant ECN. The electronic communication network will then match a sell-order with its contra-side buy-order. Any unmatched orders will also be posted for subscribers to view. It’s common for ECNs to execute orders by maintaining buyer-trader anonymity. However, one’s transactions are charted on a trade execution report with the ECN listed as the third party.
Benefits of Using an ECN
The obvious benefit of using an ECN is quicker, more hassle free trading across the globe. Traders also get flexibility in their trades as they can make moves after hours using an ECN. Finally, there is the anonymity afforded to brokers and individuals who use an ECN. There are other benefits to ECNs that are slightly less obvious. One of them is as follows.
Certain ECNs can offer their subscribers added features. These include giving ENC brokers access to negotiation, pegging, reserve size, and more. Some ECN brokers may get access to an entire electronic communications network book which gives them access to real time market data. With data like the depth of trading interests, these brokers hold an advantage when it comes to making calculated market moves.
Conclusion
To summarise, ECNs are computerised portals that match contra side orders among traders on a certain exchange or market. They make trading efficient: by essentially making it faster and more flexible. The only potential downside of using ECNs is that transactions require a commission or fee which can add up if one makes a lot of trades each day.
