ECN stands for Electronic Communication Network, which is a computerized network used by traders to facilitate their trading in financial instruments by essentially speeding up and streamlining the process it takes to execute an order, which adds real efficiency to the trading process. It is regarded as a reliable and convenient method of trading that enables buyers and sellers to trade instantly in a cost-effective manner and outside the market making model.
It is easy to understand why ECN use has become so widespread. The main aim of an Electronic Communication Network it to essentially eliminate any role of a third party in the process of executing trading orders. It allows the orders to be executed by passing the trading order directly to the liquidity provider, all for a very low per trade fees.
The technology behind the Electronic Communication Network model is complex and very advanced, it has all advantages of the market maker model but without the disadvantages, which helped in making it a requirement by most traders these days.
The ECN model is originally designed for brokers and institutional investors to allow them to send large orders to be executed, but now is used by all types of traders as companies are increasingly adopting the ECN model in providing its services.
From the broker’s side, the ECN displays the liquidity providers name, size of order and the bid and ask quotes from a multitude of participants in the market, then orders are they automatically matched and executed. It must be noted however that the majority of orders placed through an electronic communication network are pending orders.
The Electronic Communication Network has been around for quite a while now and it really changed how trading firms operates. As more brokers are adopting the ECN model, competition grew between trading firms as they were forced to present better services and lower their transaction costs.