What is Electronic Communication Network?

Key Highlights

• A digital platform known as an electronic communication network (ECN) connects buyers and sellers seeking to exchange securities on the financial markets.
• To provide investors with privacy, ECNs allow brokerages and investors in different geographic areas to trade without a third party involved.
• ECNs allow the market to take place outside traditional trading hours so that investors can react to or anticipate news on an after-hours basis.

Understanding Electronic Communication Network

A digital network connecting buyers and sellers on listed markets is the Electronic Communication Network (ECN). These systems are designed to match each purchase order with the sale order, connecting big institutions, retail investors, and stockbrokers. In this way, ECNs eliminate intermediaries or mediators's roles in securities transactions. In addition, ECNs allow traders to buy and sell securities instantly using digital technology that disregards geographical boundaries.

You can buy and sell stocks and bonds on traditional stock markets with the help of ECNs. By 1969, Instinet had become the first electronic communications network.

How does ECN work?

Let's take a look at how these things work now that we're talking about what ECN is. Traders are connected through ECN, which means that this portal automatically matches buyers and sellers of the same stock. An ECN is a computerized system that provides quotes from various market participants on the basis of the best ask and offer. Orders will be executed automatically by the ECN when traders match one ask for every bid.

In order to satisfy their financial obligations, ECN makes money by charging a fee for each transaction. The purpose of the ECN is to eliminate all other parties. Orders are usually executed by third parties like brokers, whose role is to act as an ECN intermediary and match the trader's orders.

Who is an ECN for?

Therefore, transactions are made during periods other than traditional commercial hours by the use of a computerized communication network. The ECN establishes a mechanism for those individuals who are unable to take part in regular market hours. Moreover, those who prefer flexibility in their business time horizons are also well pleased with them. ECN also prevents increased spreads, which is a common occurrence for traditional brokerages with overall lower fees and commissions.

ECN provides an additional degree of protection and privacy for individuals who are concerned about their privacy. Investors might use ECN if they like to remain private when conducting huge trades.

How to Trade Using ECN?

You only need to be registered or a subscriber of the broker that provides its customers with direct access trading if you want to trade through an ECN. Any subscriber can enter orders in the ECN of his choice using a special computer terminal or network protocol. Then, an electronic communications network matches the sell order to its contralateral buy order.

There will be a display of any unmatched orders that the subscribers can see. In the case of ECNs, orders are executed by maintaining buyer-trader anonymity. On a trade execution report, however, an individual's transactions are displayed, and the ECN is identified as the third party.

What are the Perks of Using ECNs?

Electronic communication networks (ECNs) provide the following benefits to investors:

1. ECN trading is less stressful, easy, and accessible.
2. You can decide to order your orders beyond this time limit through an ECN if you are not able to take part in the trade during regular trading hours.
3. In addition, ECNs also provide traders who are concerned about privacy on the online trading platform with some degree of anonymity.
4. As the ECNs generate bid and ask prices for securities across different markets, you will usually find better prices than traditional market makers.
5. ECN brokers will not negotiate your request for sale or purchase. Only your request will be sent to the exchanges.

What are the Cons of ECNs?

Here are a few drawbacks you need to know about ECNs, along with the above benefits.

ECNs only make a profit by charging access fees and transaction charges. Accordingly, substantial transaction fees can also be charged by some ECNs for each trade. Many investors may not be able to afford them. Certain ECN trading platforms are not user-friendly. It is an obstacle for traders who do not have good skills in the use of computers. The price of securities traded on ECNs can vary from that in the wider market. This is because ECNs are generally involved in the matching of orders on their network.

Conclusion

Essentially, ECNs are computerized portals for matching opposing orders between traders on a given exchange or market. It will improve the efficiency of trade, in essence, enabling faster and more flexible transactions. The commission or cost associated with transactions is the only possible drawback of using ECNs, and it might build up if a trader executes a lot of deals every day. For any kind of securities exchange, go ahead with trading platforms like Kotak Securities.