Electronic Communication Networks—what are they?
Electronic trading networks (ECNs) enable instant trades. It eliminates brokers and market makers.
ECNs gave traders quick financial market access in the 1990s. Before ECNs, brokers executed trades and provided market liquidity. By directly connecting buyers and sellers, ECNs made trading more efficient and transparent.
How does ECN work?
Banks, traders, and institutional investors place buy and sell orders on ECNs. They match traders’ orders by price and availability for optimal execution.
ECN traders may rapidly access each other’s orders. Traders may measure market depth and choose the best price with transparency. ECNs conduct deals after connecting buyers and sellers.
ECN traders may get Level 2 market data in real time, showing all network bids and requests. This lets traders utilize market liquidity and make informed decisions.
The ECN advantages
Trading on an ECN offers advantages:
ECNs have small spreads because market participants trade directly.
ECNs are not market makers, therefore traders and platforms are impartial. Simply put, ECNs facilitate trades.
More transparency: Level 2 market data helps traders assess market depth and make smarter trades.
High liquidity: ECNs mix orders from multiple market participants, giving traders greater chances to find a good price.
Negative ECN
Pros and drawbacks of ECNs:
Most ECNs impose transaction fees. Trading costs may rise, particularly for high-frequency traders.
A minimum deposit is required for several ECN trading platforms.
News releases and market uncertainty may trigger ECN volatility. Wider spreads and slippage may result.
Conclusion
Trade has altered because ECNs provide direct access to financial markets without intermediaries. ECN features include tight spreads, transparency, and liquidity. But ECN trading charges, minimum deposits, and market volatility must be addressed.
Sources and Links
1. Investopedia: https://www.investopedia.com/terms/e/ecn.asp
2. Wikipedia: https://en.wikipedia.org/wiki/Electronic_communication_network