Electronic Communications Network or ECNs are execution venues which are providing the infrastructure for matching buyers with sellers.
Electronic trading is traditionally used in OTC products and outside of exchanges.
An ECN normally functions as an electronic system that disseminates orders entered by market makers to third parties.
In doing so, an ECN permits the orders to be executed against in whole or in part.
The most common products that are traded on ECNs are stocks and currencies, making them integral players in the equities and FX market.
However, lately the products are also used to trade derivatives on currency products and are expected to gain traction in fixed income products.
ECN transactions are typically associated with the lowest commission rates.
The ECN matches orders entered by market makers to third parties and enables these orders to be executed against a counter-party wholly or partially.
ECNs are passive computer-driven networks that internally match limit orders and charge a very small per share transaction fee.
True ECN Model
A true ECN broker allows the broker to display to its clients the actual interbank market price and displays the order in the market.
The trade is matched with another trader or financial institution and typically isn’t loaded with a spread mark-up.
While virtually all of the conflict of interest between ECN brokers and clients is eliminated, there are no guaranteed fills and typically the smallest lot possible is 100,000 units of the base currency.
In the FX space, there are multiple ECNs that 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.