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An electronic communication network, or ECN, is a computer-operated system that makes it possible to conduct trades outside of a stock exchange. The Securities and Exchange Commission first authorized networks of this type for use in the United States in the late 1990’s. Today, electronic communication networks are used extensively by traders all over the world.
The Securities and Exchange Commission classifies the electronic communication network as what is known as an alternative trading system or ATS. As part of this family of trading systems, the ECN does not allow access by the internal crossing networks operated by some brokers and dealer, since these systems process orders without actually sending the orders to a public venue. The focus of an electronic communication network is to allow direct access trading, not any type of automatic matching of orders with the prices currently on an exchange, as is the case with a crossing network.
For the most part, trading on an electronic communication network is focused on buying and selling stocks and currencies. Because of the fast pace that is common with currency trades as well as with trading stocks, the ECN is capable of initiating real time transaction activity that will execute the order with the same speed it would be executed by trading directly on the exchange using more traditional methods. This effectively makes it possible for investors all over the world to trade without regard to their local time zone. As long as the exchange is open and accepting transactions, it is possible to use the ECN to make investment trades.
Not everyone can trade on an electronic communication network. The investor must either be a subscriber to the ECN, or have an established account with a dealer or broker who is registered with the network. At one point, executing orders required a customized terminal access, but today the network can be accessed using proprietary network protocols as long as a secure Internet connection is established.
As with any type of trading activity, there are fees connected with the use of an electronic communication network. Users may choose to go with what is known as a classic pay structure, which is simply a flat charge to anyone using the network. The second alternative, known as a credit pay structure, involves charging a fee to liquidity removers using the system while offering a credit or rebate to liquidity providers. Each ECN determines whether to offer one or both of these fee structures to their subscribers.