Electronic Communication Network - ECN

What is an ECN?


An electronic communication network, or ECN, is an order matching platform which connects investors directly to brokerage houses, rather than processing trades through a middle man. By providing direct access to the ECN, brokerage houses are able to bring down costs and consquently offer lower commission schedules to their clients. 

ECN's will have an order book for each security and will display all buy and sell orders in real time which were placed by individual traders, broker/dealer, institutional investors, and even market makers.  Individual traders must subscribe to an ECN through their online broker before they are able to transact on them.  Orders wi

ECN Variations


There are a few different ECNs that exist out there:

Instinet

Instinet is the oldest ECN out there, being established in 1969 to provide a block crossing capability for institutional investors.  Basically, it created a facility to allow large institutional block orders to be transacted directly between institutions without market maker or specialist intervention.  Today, Instinet has been expanded to trade many of the stocks listed on the Nasdaq Composite and many of the other major exchanges.  Instinet has also been cited as a pioneer for after hours trading.

Small Order Execution System (SOES)

SOES was established to resolve inefficiencies that would result in a panic type of market event where orders were coming in with enormous volume.  SOES was set up to provide liquidity and automate order execution on transactions of less than 1000 shares.  To trade on the SOES, a list of rules apply.  Firstly, a trader cannot perform a transaction of more than 1000 shares at a time and if they choose to trade that stock again, they must wait 5 minutes.  Secondly, no stocks over $250 are allowed to trade through this network.  At the end of the day, SOES gives individual investors the ability to achieve the same executions that larger institutions are receiving.

NYSE Arca

NYSE Arca, also known as ArcaEx or Archipelago, is an ECN which trades stocks listed in NYSE, AMEX & Nasdaq.  In addition to offering trading on equities, Arca Ex trades options on indices, ETFs, equities & foreign exchange currency pairs.  ArcaEx accounts for nearly 10% of NYSE volume and nearly 20% of volume at the Nasdaq.
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