ECN is a computerized stock exchange, and the abbreviation itself means “Electronic Communication Network”. ECN brokers provide their clients with direct access to other participants of the forex markets, including first-rate liquidity providers (Major Banks). The essence of ECN functioning is consolidation of price quotations from a number of market agents, therefore ECN clients in most cases are offered tight bid/ask spreads. The best bid and ask quotes from various market participants are brought together automatically and this is how the orders are executed. In most cases the orders placed via ECN are limit orders.
ECN concept embraces not only trading on major exchanges during their operational time, but also trading after working hours and trading forex. Some ECNs are specifically adjusted for institutional investors, whereas also there exist ECN types matching the demands of the retail clients. Generally, ECNs mean speedy execution, passive order matching and automated trading.
The benefits of trading with one of the top ECN forex brokers are clear for a stock trader. On a ECN account a transaction takes place directly between market participants, without any third parties involved.
Moreover, all ECN trading activity is completely anonymous. This enables traders to deal on neutral prices, which reflect the real market conditions. These prices are not artificially formed against the client's trading strategies or tactics.
Among ECNs’ advantages is also significant reduction of trading transaction costs: on an electronic exchange there’s no need for a trader to be on an exchange floor. With an ECN forex account a trader needs just a computer and an Internet connection to be able to execute ECN trading operations.
To be able to place orders directly with an ECN a trader must be subscribed to ECN. Then he is able to transact over the network and to see the shares available to buy and sell on the ECN’s order books.
On an ECN, clients have direct access to market prices. Market prices fluctuate reflecting supply and demand, volatility and other conditions.
An execution takes place when the price of a buy order and the price of a sell order intersect on the ECN.
Who can be a ECN subscriber? Most commonly these are institutional traders and broker-dealers, whereas private traders need to have an account with a broker-dealer to be able to trade on a ECN.
In case a trader chooses to subscribe to the full suite of popular ECNs, it becomes possible to transact over the one that best suits the trader’s liquidity needs and balances its potential with the transaction costs. In other words, this is how the trader can most likely have the order closed at the best price and at the lowest cost.
As for the fee structure for transactions, each ECN has it specifically tailored. In some cases rebates are paid to the traders for adding liquidity to their books; in other cases rebates are paid for the opposite, whilst the fees are correspondingly charged the opposite way too. Rebates offered can be as high as about $.003 per share. Costs as well can be as high as $.003, but not any higher than this. Additionally, there are some ECNs that pay higher rebates to their clients (or charge lower fees) for trading higher volumes over the network once the trader’s operations match certain volume criteria.
From a trader’s point of view, it is advantageous to trade with a broker offering direct market access with reasonable rebates and fees. In any case, in ECN trading the fees depend on the transaction volume and are not flat: if an order is small, the trader will be charged a correspondingly small fee.
The electronic communication networks as a whole are classified as the LIT or Light pool markets. These are the markets available for all of the public to see. This is where about 50 percent of all volume transacts in the stock market. The opposite of LIT markets are dark pool markets.
As for ECNs, they do not function first off as dark pools, but some are now offering subscribers access to deeper pools of liquidity by offering some of their own dark pools.
Objectively speaking, currently not too many retail traders are aware of the ECN trading advantages and keep on sticking with the familiar retail brokerages which guarantee stable performance due to years of operation in the financial markets.