Electronic Communication Network (ECN)

Loading the player...

What is an 'Electronic Communication Network (ECN)'

An electronic communication network (ECN) is an automated system that matches buy and sell orders for securities. An ECN connects major brokerages and individual traders so that they can trade directly between themselves without going through a middleman. The ECN makes money by charging a fee for each transaction. ECNs make it possible for investors in different geographic locations to quickly and easily trade with each other. The Securities and Exchange Commission requires ECNs to register as broker-dealers.

BREAKING DOWN 'Electronic Communication Network (ECN)'

An ECN attempts to eliminate the third party’s role in executing orders entered by an exchange market maker or an over-the-counter market maker, and permits such orders to be entirely or partly executed. Orders placed through ECNs are usually limit orders.

ECNs display the best available bid and ask quotes from multiple market participants, then automatically match and execute orders. They not only facilitate trading on major exchanges during market hours, they are also used for after-hours trading and foreign currency trading. ECNs allow for automated trading, passive order matching and speedy execution. Some ECNs are designed to serve institutional investors, while others are designed to serve retail investors.

Some of the different ECNs include Instinet, SelectNet and NYSE Arca. Instinet was the first ECN (1969), and it is used by small brokerages and for transactions between institutions. It is widely used by market makers for Nasdaq trades, but individuals and small firms can use it, too. SelectNet is used primarily by market makers, but it doesn’t require immediate order execution and it helps investors trade with specific market makers. NYSE Arca grew out of the merge between the New York Stock Exchange and Archipelago, an early ECN (1996). It facilitates electronic stock trading on major U.S. exchanges like the NYSE and Nasdaq.

RELATED TERMS
  1. ECN Broker

    A forex financial expert who uses electronic communications networks ...
  2. Archipelago

    An electronic communications network (ECN) that merged with the ...
  3. Instinet

    A global financial securities company that operates an electronic ...
  4. EDGX

    A high-volume trading platform owned by Direct Edge ECN LLC, ...
  5. Execution

    The completion of a buy or sell order for a security. The execution ...
  6. NYSE Arca

    A securities exchange in the U.S. on which stocks and options ...
Related Articles
  1. Investing Basics

    What's an Electronic Communications Network?

    An electronic communications network connects buyers and sellers so they can directly trade stocks, currencies and other financial instruments.
  2. Retirement

    Electronic Trading: Electronic Communications Networks (ECNs)

    An electronic communication network (ECN) is an electronic system that attempts to facilitate (for market makers) or eliminate (for individual investors) third party orders entered by a client's ...
  3. Forex Education

    Market Makers Vs. Electronic Communications Networks

    Learn the pros and cons of trading forex through these two types of brokers.
  4. Professionals

    Handling And Displaying Customer Limit Orders

    If a market maker accepts customer limit orders, it must handle the order in accordance with The Limit Order Display Rule. If a market maker accepts a customer’s limit order that would ...
  5. Investing Basics

    Activities You Can Take Advantage Of In The Pre-Market And After-Hours Trading Sessions

    A great deal can happen in between the New York close of the market and the open the following morning. Learn how you can access opportunities and hedge against risk outside regular trading hours.
  6. Professionals

    D. NASDAQ

    Securities that are not listed a centralized exchange trade over the counter or on the NASDAQ. NASDAQ stands for National Association of Securities Dealers Automated Quotation System. It is the ...
  7. Retirement

    Electronic Trading: Conclusion

    If you are a long-term investor, you can take this tutorial with a grain of salt. At least now you have some insight into how electronic systems give direct access to the market. We hope this ...
  8. Investing Basics

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  9. Professionals

    NASDAQ Execution Systems

    Most NASDAQ trades are executed over the NASDAQ workstation using one of its automated execution systems. These systems allow dealers to execute orders without having to speak with one another ...
  10. Professionals

    Market Makers

    Because there are no specialists for the over the counter markets, bids and offers are displayed by broker dealers known as market makers. A market maker is a firm that is required to display ...
RELATED FAQS
  1. What kind of assets can be traded on a secondary market?

    Learn about the difference between the primary market and the secondary market, and what types of assets are traded on secondary ... Read Answer >>
  2. Why are the bid and ask quotes usually so far away from each other in after-hours ...

    After-hours trading is defined as the exchange of securities outside of an exchange's specified regular trading hours (usually ... Read Answer >>
  3. How do financial advisors execute trades?

    Understand how financial advisors normally execute an investor's trades. Learn about the different type of markets and exchanges ... Read Answer >>
  4. Why does after-hours trading (AHT) exist?

    The advent of the Internet and electronic information exchanges has opened financial market trading to millions of investors ... Read Answer >>
  5. What exactly is being done when shares are bought and sold?

    Most stocks are traded on physical or virtual exchanges. The New York Stock Exchange (NYSE), for example, is a physical exchange ... Read Answer >>
  6. What's the difference between a Nasdaq market maker and a NYSE specialist?

    What's the main difference between a specialist and a market maker? Not much. Both the New York Stock Exchange (NYSE) specialist ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center