ECNs
An ECN is an electronic system that matches buy and sell orders directly. Learn how ECNs work, their fees and rebates, ECN forex accounts and their role today.
An electronic communication network, or ECN, is an automated trading system that matches buy and sell orders directly between participants, without a traditional dealer standing in the middle. ECNs played a huge role in turning floor based markets into the fast electronic markets we have today. In US stocks, most of the original ECNs became, or were bought by, exchanges. In forex, the term lives on in "ECN accounts" offered by brokers.
How an ECN works#
An ECN keeps an electronic order book. Participants post limit orders, and the system automatically matches orders that cross. Prices are displayed to subscribers, so traders see real bids and offers from other participants rather than a single dealer's quote.
| Feature | ECN | Traditional dealer market |
|---|---|---|
| Who sets prices | Participants' own orders | The dealer |
| Counterparty | Other participants | The dealer |
| Transparency | Order book visible to subscribers | Dealer quotes only |
| Costs | Commission plus raw spread | Spread includes dealer's profit |
A brief history#
In the 1990s, ECNs such as Instinet, Island and Archipelago offered faster, cheaper and more transparent trading than the Nasdaq dealer system or the NYSE floor. SEC rules introduced in the late 1990s required better display of customer limit orders, which helped ECNs grow. Over time they reshaped the market: Archipelago merged with the NYSE in 2006, forming what is now NYSE Arca, and Nasdaq acquired the platforms operating Island and Instinet's ECN business. BATS, founded in 2005 as an ECN, became an exchange and is now part of Cboe.
Maker taker pricing#
ECNs popularised maker taker pricing: participants who post orders that rest in the book (makers) receive a small rebate, and those who take liquidity (takers) pay a fee. This model, now common on exchanges, encourages liquidity provision. Active traders using Direct Market Access and Sponsored Access can choose venues partly based on these fees and rebates. See Commissions and Fees.
ECN accounts in forex#
Many forex brokers offer "ECN" or "raw spread" accounts. Orders are passed to a pool of liquidity providers, such as banks and market makers, and you see their combined bids and offers with very tight spreads, paying a separate commission. This contrasts with "dealing desk" or "market maker" accounts, where the broker is your counterparty and its profit is built into a wider spread. ECN style accounts usually suit active traders who value tight spreads and transparency. See Forex Trading and How to Choose a Broker.
ECNs in today's market#
In US equities, the line between ECNs and exchanges has largely disappeared; most former ECNs operate as registered exchanges. Remaining alternative trading systems include dark pools and other non displayed venues. See Dark Pools and Order Routing and Smart Order Routing.
Advantages and drawbacks#
| Advantages | Drawbacks |
|---|---|
| Transparent prices from real orders | Commissions on top of spread |
| Tight spreads in liquid markets | Liquidity can thin out fast in volatile moments |
| Anonymity | More complex fee structures |
| Fast, automated execution | Requires understanding of order types and venues |
Frequently asked questions#
What does ECN stand for?#
Electronic communication network, an automated system that matches orders between participants.
Are ECNs the same as exchanges?#
Many former ECNs became registered exchanges. Functionally they are similar; the difference today is mostly regulatory status.
Is an ECN forex account better?#
For active traders who want tight spreads and transparent pricing, often yes. Compare total cost, including commissions, with standard accounts.
Sources#
- Wikipedia, Electronic communication network
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