An electronic communication network (ECN) is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. ECNs increase competition among trading firms by lowering transaction costs, giving clients full access to their order books, and offering order matching outside of traditional exchange hours. ECN’s are sometimes also referred to as Alternative Trading Networks
How does an ECN work
To trade with an ECN, one must be a subscriber or have an account with a broker that provides direct access trading. ECN subscribers can enter orders into the ECN via a custom computer terminal or network protocols. 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. The ECN will post unmatched orders on the system for other subscribers to view. 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, reserve size, and pegging, 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.
ECN’s and the Forex Markets
FX ECNs like Currenex, Bloomberg Tradebook (an affiliate of Bloomberg L.P.), Hotspot FX, FXall & BAXTER Financial Services Ltd with Currency Dealing provide access to an electronic trading network, supplied with streaming quotes from the top tier banks in the world. Their matching engines perform limit checks and match orders, usually in less than 100 milliseconds per order. The matching is quote driven and these are the prices that match against all orders. Spreads are discretionary but in general multibank competition creates 1-2 pip spreads on USD Majors and Euro Crosses. The order book is not a routing system that sends orders to individual market makers.
It is a live exchange type book working against the best bid/offer of all quotes. By trading through an ECN, a currency trader generally benefits from greater price transparency, faster processing, increased liquidity and more availability in the marketplace. The banks also reduce their costs as there is less manual effort.
List of forex ECN brokers to trade with
Trading with an ECN forex broker offers a many great benefits, the primary being the lack of counter quotes. Trading with an ECN/STP Forex broker offers for fast executions and can help traders to trade the markets during major news releases. While there are many ECN forex brokers, here is a list of the best forex ECN brokers to trade with.