Electronic Communications Networks (ECNs)
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What are Electronic Communications Networks (ECNs)? Electronic
Communications Networks are conduits over which you announce
your intentions to buy or sell a stock. Your orders are matched with
other orders from individuals like yourself. ECNs add liquidity to
the National Association of Securities Dealers Automated Quotations
(Nasdaq) system without the involvement of a market maker. Market makers make their money by creating a spread on each
trade. By placing your order on an ECN, in most cases you bypass
the spread, because most ECNs do not sell their order flow. I think
of ECNs as an electronic dating service for stocks, matching willing
buyers with willing sellers.
The broker-dealers subscribe to the ECNs and pay a fee to facilitate
the trade. ECNs must be registered with the Nasdaq to participate
in the market. The ECN system brings additional customer
orders into the Nasdaq market. Both customer orders and market
makers post their orders on ECNs to achieve a more liquid market.
Electronic trading has been credited with narrowing the spread on
most stocks traded on the Nasdaq market. An advantage of electronic
trading that is not available to the online trader is the ability
to buy on the bid and sell on the ask. Most of the time an online
trader sees only the national best bid or offer (NBBO). The electronic
trader often splits the bid and offer, thereby narrowing the
spread on the stock. Electronic trading tactics will be covered in
Chapter 6.
The first ECN, known as Instinet, came into existence in 1969.
For many years Instinet-owned Reuters was the only ECN around.
Today nine ECNs exist and several more are planned for the future.
Before I address the different ECNs, I think it is important to note
the effect ECNs have had on the New York Stock Exchange (NYSE).
Proposed extended trading hours for the NYSE have been the result
of pressure put on NYSE by the ECNs. After-hours trading, using
ECNs, is forcing the NYSE to make changes in the old way of doing
business. In my opinion, the ECNs will bring about 24-hour trading.
Not long after that will come global electronic trading for individuals
who wish to trade international markets.
What are Electronic Communications Networks (ECNs)? Electronic
Communications Networks are conduits over which you announce
your intentions to buy or sell a stock. Your orders are matched with
other orders from individuals like yourself. ECNs add liquidity to
the National Association of Securities Dealers Automated Quotations
(Nasdaq) system without the involvement of a market maker. Market makers make their money by creating a spread on each
trade. By placing your order on an ECN, in most cases you bypass
the spread, because most ECNs do not sell their order flow. I think
of ECNs as an electronic dating service for stocks, matching willing
buyers with willing sellers.
The broker-dealers subscribe to the ECNs and pay a fee to facilitate
the trade. ECNs must be registered with the Nasdaq to participate
in the market. The ECN system brings additional customer
orders into the Nasdaq market. Both customer orders and market
makers post their orders on ECNs to achieve a more liquid market.
Electronic trading has been credited with narrowing the spread on
most stocks traded on the Nasdaq market. An advantage of electronic
trading that is not available to the online trader is the ability
to buy on the bid and sell on the ask. Most of the time an online
trader sees only the national best bid or offer (NBBO). The electronic
trader often splits the bid and offer, thereby narrowing the
spread on the stock. Electronic trading tactics will be covered in
Chapter 6.
The first ECN, known as Instinet, came into existence in 1969.
For many years Instinet-owned Reuters was the only ECN around.
Today nine ECNs exist and several more are planned for the future.
Before I address the different ECNs, I think it is important to note
the effect ECNs have had on the New York Stock Exchange (NYSE).
Proposed extended trading hours for the NYSE have been the result
of pressure put on NYSE by the ECNs. After-hours trading, using
ECNs, is forcing the NYSE to make changes in the old way of doing
business. In my opinion, the ECNs will bring about 24-hour trading.
Not long after that will come global electronic trading for individuals
who wish to trade international markets.