What is an Electronic Communication Network?

An electronic communication network (ECN) is a computer-based system of trading that takes trading outside of the physical market. 

It is a computerized system that allows investors trade securities and other financial products electronically without having physical contact in the market. 

ECN obviates middlemen when trading securities. 

It uses a network of electronic devices to match orders for securities, buyers and sellers are matched and they can directly trade through ECNs. 

ECNs enhance trading of financial products between investors regardless of their region or geographical locations. 

Trading occur on a computerized system and outside traditional marketplaces. In the U.S, ECNs are required to register with the SEC as broker-dealers.

How Does an Electronic Communication Network Work?

The Securities and Exchange Commission categorize ECNs as alternative trading systems (ATS). Instead of the middlemen that facilitate trade between investors in exchange for a fee or commission in the tradition exchange, ECN charge transaction fees electronically. Through ECNs, traders can successfully buy and sell securities and other financial instruments without the need for a market maker or a middle man. ECNs offer an electronic platform for trade of securities, this enhances flexibility of investors as well as wider coverage. Trade can occur between investors regardless of where they are located in the world. However, it is important to know that orders placed through ECNs are limit orders, also, an investor can clone his identity through ECNs. Despite the benefits of using ECNs, they are quite expensive to access. Investors are required to pay access fees before using the site as well as commission on the trade made through ECNs.

Functions Provided by an Electronic Communication Network

On an Electronic Communication Network buying and selling orders for securities are automatically matched through a computerized system. Here, trading is executed electronically, investors who might not have time to participate in the traditional exchange market resort to the use of ECNs. ECNs enhance flexibility of investors and makes them available for trade for a longer period of time. For instance. Unlike physical and traditional markets that have market hours, trading still continue on ECNs after trading hours. The bid and ask quotes supplied by a variety of investors at a specific time are displayed on the computerised system. ECNs aid speedy executions of orders to buy and sell securities. There are different kinds of ECNs, while some are designed for institutional investors, some are made for smaller investors.

Examples of Electronic Communication Networks

The first type of Electronic Communication Network (ECN) was created in 1969, it was named Instinet.After Instinet. There were some other ECNs that were developed including SelectNet and NYSE Area. These ECNs can be used by small traders and institutional traders. Also, market makers and small brokerages facilitate trade between investors using ECNs. The merger between the New York Stock Exchange (NYSE) and Archipelago in the 1990a gave rise to NYSE Arca. this ECN is used for stock trading in the U.S. SelectNet on the other hand is used by market makers or ECN brokers who facilitate trade between investors using the electronic platform.

Other Alternative Trading Systems

Alternative trading systems (ATS) basically create an alternative avenue for trading different from the tradidional stock exchanges. In the United States, ECNs are described as ATS by the Securities and Exchange Commission. Aside form ECNS, other forms of alternative trading systems exist, these are matching systems and call markets. Usually, ATS use limit orders as a way of monitoring orders and how they are matched automatically. If orders are received and no match is found for a particular order, the order ecomas a quote in the book. Matching systems receive orders and match the orders using the matching engine, call markets, on the other hand, receive orders one at a time and also monitor exchange activity through automated means.