Electronic Communication Network (ECN)

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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.

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