What Are Electronic Communication Networks ECN?
Today everyone who’s Involved in Operations on the U.S. stock market knows About ECNs. But There Are not Many People Who Really Understand the Basic Principles of ECNs. This article Explains the MOST important things about NEC systems. ECN is an automated computer trading system. The first NEC WAS INSTINET – a trading network Established in 1969, Long Before the term ECN Appeared in dictionaries. Most of the other ECNs (Island, REDI, ARCHIPELAGO, BLOOMBERG, BRUT) Have Been built on the Principles of the first ECN – INSTINET. New rules of order execution Became a catalyst for the intensive ECN’s Development. New rules Were Approved After a long discussion in the Investors’ community, as well as in brokerage houses. The main goal of the new rules Was the modification of the Existing order execution algorithms so That Every investor get the best possible Could price by an order submission, or whether I buys sells shares. New rules to terminate Were all market-makers’ Opportunities to gain extra profit from unfair execution order. ECNs manage this task in the best possible way. By the way, ECNs allow working on the stock market market-makers Without more Efficiently. The first task of ECN systems is to execute buy orders by sell orders of equal volume. This process goes Automatically, for example, if the system Receiver to sell order for 1000 shares of XYZ Inc. at $ 10 per share, it looks for the Same Will buy order (ie, the amount of shares at Same a particular price). Automated search of two orders is the fastest equal and The Most Effective Way of Fulfilling orders. By the way, FIFO execution Principle (First In First Out) Guaranteed Investors to individual execution not fair trading volumes Depending on staff. So, today ECNs work as a quasi-stock exchange. If an order is not Opposite found in the system, an ECN algorithm use the Same as the NASDAQ does: it transfers the best available bid and offer to the NASDAQ. NASDAQ’s Level 2 quotes show this information screens under the name of the NEC. When the bid or offer of the ECN Becomes Among the best available on the NASDAQ, anyone who is Following NASDAQ quotes, historical Enters Opposite order at the Same price Which leads to the execution of the order, originally Enter in the NEC. Thuso, fulfills two functions ECN: it is an electronic exchange and the quasi-market maker in the NASDAQ trading system. Under the rules of the Securities Commission (SEC), registered as ECNs Can Be an electronic stock exchange, i. e. , They Are Officially Recognized As stock exchanges. ECNs’ Advantage The main Advantages are: anonymity, automated order execution and low costs. Buyers and sellers dog put Into Their orders and not worry ECN Information about That Will Affect Their activity the market. There is no human factor Completely in order execution, so far the electronic system and execute all orders Accepts. Not only speed up ECNs the trading process, But Investors Also spare money: They do not try to make extra cash on the Difference between the price in order and the current market price just like it Happens on the way “broker-NASDAQ market-maker “. Many ECNs Today expand trading time trading by Adding Several hours before an open market and after-session. Obvious That It is in the Near Future Will Be ECN trading-through available round the clock. Trading in NEC’s Disadvantages ECNs is Extremely Highly efficient liquid if you trade stocks That Have a lot of one-time buy and sell orders. That Increase the Probability of the Presence of two active Opposite orders in the system equal. It May be not a very good idea to trade less liquid stocks to in ECNs. In This situation it’s better to send your orders to traditional market-makers of the NASDAQ. By the way, shares Can Have the Same Different Different liquidity level in ECNs.