Electronic Communication Network (ECN)

Podcast Duration: 05:45

Hi friends and welcome to this podcast by Angel One.

Doston stock market mein thousands and millions of investors place buy and sell orders every second. Ye orders aate hain, stock exchange ke trading floors lekar aapke broker ke mobile trading apps se, trading websites se and so on. Ye orders aap easily place kar dete ho, with the click of a button.

But how are these trading orders executed? Is podcast ka title dekhkar you might have wondered - kya ye podcast stock markets ke baare mein hai? Short and simple answer - yes it is!

Is podcast mein hum 3 cheezon par focus karenge: what Electronic communication networks are, why they are used, and some famous examples of ECNs since their inception.

So are you ready? Let’s dive in.

We were discussing ki markets mein buy aur sell orders kaise execute hote hain.

There are many ways in which stock market orders get executed. For example, aapka buy ya sell order aapke account se broker ke paas jata hai. Then, broker ye decide karta hai, ki is order ko fulfil karne ka best tarika kya hai. Then, the order is fulfilled by routing it appropriately.

Sounds cool, right?

So, it is possible ki aapka order directly trading floor par fulfil hone ke liye bhej diya jaaye. It is also possible ki aapka order internally hi fulfil kar diya jaye. Yani ki, your order already exists in the broker’s inventory of securities.

ECN, ya fir electronic communication network is tarah ka ek alternative trading system hota hai, jo orders ko directly fulfil karta hai, rather than through a 3rd party.

So, what does this look like in reality?

ECN is usually deployed by a broker or an institution. So, ECN is a network, jo market mein liquidity providers ko connect karta hai.

Now what are liquidity providers?

Doston liquidity providers basically bade institutions hote hain, like big banks, trading companies, ya fir brokers themselves - jo securities ko large scale par buy karte hain.

Ye institutions basically ECN ke through chote institutions ko securities directly supply karte hain.

Sounds interesting, right?

So ECNs deploy karne ke liye trading members ko regulators ke saath register karna padta hai.

For example, in the USA, ECNs implement karne ke liye SEC, ya fir Securities Exchange Commision requires you to register as a broker-dealer. In India, ECNs have not been legalized yet.

Lekin you must be wondering. ECNs implement karne ka kya point hai?

Let’s see.

As we had noted, ECN basically ek computerized system hota hai. Ye system buy aur sell orders ko automatically match karta hai. Essentially, jo bhi parties ECN ke zariye connected hain, wo buy aur sell orders ko execute karte hain within themselves.

Since ECNs mein middleman involved nahi hote, these markets can be up at night also. Jo brokers ECNs se connected hote hain, they can facilitate trading even after the markets have closed.

Iske alawa, ECNs geographical location se limited nahi hote.

Sounds interesting, doesn’t it?

Now let’s take a look at markets inside these networks.

ECNs usually market makers ko bypass karte hain. Doston, do you know what market makers are?

Market makers basically ek exchange create karte hain, and from the same exchange, they also buy securities for their own account.

Understood? Ok, then let’s move on.

ECNs par order execution bahut fast hota hai. Remember when we mentioned ki ECNs par aap after hours bhi trading kar sakte ho.

But the thing about after hour trading is that price fluctuations can be high after conventional trading hours. That’s why, ECNs par usually limit orders place kiye jaate hain.

In systems par bid-ask spread main markets ke comparison me narrow hota hai.

Doston, there is one more important thing to understand - not all ECNs are created equal. Kuch ECNs sirf institutional investors ke liye serve karte hain, while some of them cater to retail investors too. Not only this, ECNs exist for forex and commodity markets as well.

Doston let’s look at the last cool feature of these trading systems - ECNs par aap buy ya sell orders anonymously place kar sakte ho. For investors making huge transactions, this can be very important. Apart from this, ECNs charge low transaction charges, commission, and fees.

Cool, right?

Many technology enthusiasts and thought leaders think ki dheere dheere, ECNs will completely replace traditional stock exchanges and trading floors. What’s your opinion?

Doston, if you are interested in learning more about how stock markets function, then you should definitely check out straight through processing, or STP.

Technology ke daily basis par naye applications discover kiye jaa rahe hain. ECNs are a classic example of this. Do you know that the first ECN was created in 1969? It was called Instinet, and it was used to cater to small brokers and institutional investors.

Uske baad, another major ECN that made news was NYSE Arca, jo basically ek merger ka result tha. Arca in the ‘NYSE Arca’ represents Archipelago, jo 1996 mein ek famous ECN tha. Archipelago merged with NYSE, aur Archipelago ke ECN ko rename kar diya gaya, to NYSE Arca.

Sounds Interesting, right?

Toh doston aaj ke podcast mein itna hi. Are you still curious to know more about markets?

Doston, markets work in a surprising number of ways. Check out our other podcasts to learn more, ya fir visit karen www.angelone.in, and keep the learning going.

Until then, goodbye from angel broking, and happy investing.