What is Electronic Communication Network?

An Electronic Communication Network (ECN) refers to a computer system that matches the Market’s buying and selling securities’ orders automatically.

In particular, ECN trading is beneficial if investors seek to conclude a secure transaction without the assistance of a third party in different geographical areas.

Advantages of ECN

Here are all the benefits associated with ECN:

• It offers faster and more trouble-free global trading.
• A trader can also make moves after hours with an ECN since they obtain flexibility in their businesses.
• In the end, the brokers and people using the ECN get to stay anonymous and maintain the same.
• Some ECNs may offer additional capabilities to their subscribers. This includes providing access to negotiations, the reserve size, and more for ENC brokers.
• Some ECN brokers may have access to a complete electronic communications network book, giving them real-time market information. When it comes to making calculated market movements with data, such as the depth of commercial interest, these brokers have an advantage.

Working of ECN

Traders join with ECN and are automatically matched through the portal to all those who buy and sell the same stock. An ECN is any computer system that shows a number of best requests and quotations to market players. The ECN matches traders automatically and executes commands. These are employed in major exchanges, including foreign exchange trading.

ECN gains its money by charging a fee for each transaction so that its financial commitments can be fulfilled. ECN's objective is to remove any third party. In normal cases, third parties, like brokers, execute orders in accordance with an ECN function and in the association between traders and merchants.

This function is known by the market manager of public exchanges or transactions. Market makers coincide as traders to ensure that their orders are executed partially or entirely. Every order placed over an ECN is generally limited. This is somewhat handy if you wish to deal safely after hours. As stock prices are volatile, ECN offers a level of security after hours of trading.

Trading using ECN

Here are the points that you must check out if you wish to start trading using ECN:

• You must have an account with any broker service provider who gives its clients direct access to trading if you intend to trade with an ECN.
• Every subscriber can enter orders in the respective ECN via a proprietary computer terminal or network protocol.
• The electronic communication network then fits its counter-side buy order with a sales order.
• Any outstanding orders for subscribers are also disclosed for viewing.
• ECNs frequently execute orders while retaining anonymity between purchasers. However, the transactions in the ECN are listed as a third party in a trade execution report.

Market Makers vs ECN

The term "market makers" refers to volume traders who are actually ready to buy or sell stocks. In contrast to ECNs, marketers are profiting from the commissions and fees from the bid distribution. The market benefits by improving liquidity like ECNs. They improve the market.

Market makers put both the bidding and the demand prices on their computers and show them on their quote screens publicly. Typically, the spread is less than that seen by investors in ECNs because market makers derive their profit through the spread.

It would take substantially more time for buyers and sellers to match with each other without market makers and ECNs. This would decrease liquidity, make it harder to enter or leave positions and increase trading costs and risks.

Conclusion

In summary, ECNs are computerized portals that match traders on a given exchange or market on counter-side orders. They are efficient for trading and are essentially quicker and more adaptable. The only possible disadvantage of using ECNs is that transactions involve commissions or a fee that might be added up for multiple transactions a day.