Electronic Communication Network
Encyclopedia : E : EL : ELE : Electronic Communication Network
An Electronic Communication Network ("ECN") is a computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies.
ECN's came into existence in 1998 when the SEC authorized their creation.
The functioning of ECN's
In order to trade with an ECN, one must be a subscriber. ECN subscribers can enter limit orders into the ECN, usually via a custom computer terminal or a direct dial-up. The ECN will post those orders on the system for other subscribers to view. The ECN will then match contra-side orders (i.e. a sell-order is "contra-side" to a buy-order with the same price and share count) for execution. Generally, the buyer and seller are anonymous, with the trade execution reports listing the ECN as the party.Some ECNs may offer additional features to subscribers such as negotiation or reserve size, and may have access to the entire ECN book (as opposed to the "top of the book") that contains important real-time market data regarding depth of trading interest.
ECNs and the stock market
For stock, ECN's exist as a class of SEC-permitted Alternative Trading Systems (ATS). As an ATS, ECNs exclude broker-dealers' internal crossing systems – i.e., systems that match orders at the broker-dealer using prices from an exchange, without actually sending the order to a public venue.ECNs and the currency market
By trading through an ECN a currency trader generally gets a better price than trading by voice over the phone. Other benefits are greater price transparency, faster processing, increased liquidity and more availability in the marketplace. The banks also lower their costs as there is less manual involvement.See also: Foreign exchange market
History
ECNs were created out of the Nasdaq Market Makers Antitrust Litigation led by lawyer William Lerach. The litigation alleged collusion between Wall Street traders, and was proven in 1998, leading to a $1 billion settlement from major Wall Street firms. At the time of the settlement, the SEC also put in a new regulation, the Limit Order Display Rule (rule 11Ac1-4), which authorized "electronic communication networks," or ECNs.Major ECNs that became active at this time were Instinet and Island, (which were since merged into INET and acquired by NASDAQ), Archipelago Exchange (which was acquired by the NYSE), and Brut (now acquired by NASDAQ).
ECNs increased competition amongst trading firms by lowering transaction costs, giving clients full access to their order books, and offering order matching outside of traditional exchange hours.
External links
- [SEC Special study: Electronic Communication Networks and After-Hours Trading]
- [Definition]
- [Inet]
- [Archipelago]
- [Brut]
- [FXall]
- [Global Link]
- [London FX Ltd] - list of bank membership of FX ECNs
- [Celent Study of ECNs under Reg NMS]
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