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Electronic Communication Network

In an age of high-speed trading and ever-evolving technology, electronic communication networks (ECNs) have become an integral part of the stock market landscape. In this article, we will cover what ECNs are and how they facilitate more efficient trading; it quickly becomes clear why these digital platforms continue to grow in popularity. 

What exactly are ECNs, and how do they work?

At their core, ECNs are private trading systems that directly connect buyers and sellers of securities. By cutting out the traditional intermediaries of market makers and specialists, ECNs can match trades more seamlessly while providing transparency around the best bid and ask prices in real time.

When a trader buys or sells an order on an ECN, that order is broadcast to the entire ECN community. If there is a matching order (a sell order that matches the buy price or vice versa), the trade is instantly executed. All of this typically happens in just thousandths of a second. The immediacy and transparency allow for tighter spreads and reduced costs for traders.

ECNs first started emerging in the late 1990s, pioneered by firms like Archipelago (which later merged with stocks on the NYSE to form the NYSE Arca platform). Now, ECNs are run by major financial institutions like NASDAQ and electronic brokers like E*Trade. Overall, they account for over 60% of all stock trades in the US equities markets.

Key players and participants on ECN platforms

At their foundation, ECNs bring together three main groups of participants: 

1. Institutional traders – Major banks, hedge funds, mutual funds 

2. Retail traders – Individual day traders or casual investors

3. Market makers – Firms that always provide purchase and sell offers, creating liquidity

In the past, market makers controlled trade execution, which meant less favourable terms for other traders. ECNs now offer a more democratic platform where open bids and offers set prices. This levels the playing field while allowing institutional investors to trade on large blocks of shares without significantly impacting prices.

For retail traders, ECNs grant access to an enormous virtual pool of orders and liquidity. Individual traders can have their small orders filled right alongside multimillion-dollar orders from banks and hedge funds.

Key benefits that ECNs offer traders

1. Speed and efficiency

Automated order matching facilitates faster and more seamless transactions. Orders are filled in milliseconds, which becomes very important for traders implementing high-frequency trading strategies. ECNs also require fewer intermediaries like brokers or exchanges. 

2. Transparency 

ECNs allow clients to see the order book with all current bids and offers. This transparency around pricing leads to narrower spreads between the bid-ask prices.

3. Anonymity

The virtual matching platform also grants traders a level of anonymity – especially important for institutional investors executing large block orders over days or even months. Other participants only see part of the full order.

4. Lower costs

Direct market access cuts overhead costs associated with traditional brokerages and exchange fees. Passing savings along to clients is crucial for electronic brokers competing for active, high-volume traders.

5. Access and convenience

Being fully electronic systems keeps ECNs open for extended hours (or around the clock). This allows traders to react to news announcements or price swings whenever they happen. Responding to volatile moves near market opens/closes is extremely valuable.

Potential drawbacks to consider for ECNs

1. Complex order types/rules

The advanced order types and availability rules on ECNs mean there is a learning curve – especially for casual retail investors. The programming also leads to occasional glitches.

2. Fragmented trading activity

With orders spread across multiple competing platforms, it can be harder for buyers and sellers to find one other. Most ECNs now allow orders to interact with other venues, but fragmentation remains an issue.

3. Higher fees

While saving on broker commissions and exchange fees, ECNs themselves charge access fees, as well as per-share charges for removing liquidity. Active traders can rack up high monthly costs for market access and data feeds.

With these pros and cons in mind, let’s walk through exactly how to start trading through an ECN as an individual investor.

Accessing ECN trading as a retail investor 

Retail investors have a few options for accessing electronic communication networks: 

1. Via an online broker – Many offer direct access to ECN platforms

2. Through a proprietary software platform like Sterling Trader

3. With a dedicated ECN firm like Lightspeed or COBRA Trading

Online brokers like TD Ameritrade, E*Trade, and Charles Schwab now route orders directly into ECNs like NASDAQ and EDGX. The benefit here is seamless access alongside your normal brokerage account. Drawbacks include less control over order types/routing – and still paying some broker commissions.

The proprietary “software as a service” platforms like Sterling Trader offer a custom interface with advanced tools, charts, and analytics. Traders using these platforms typically pay monthly software fees and modest exchange connectivity/market data costs.

Those seeking the most direct market access can open an account with a dedicated ECN/direct access brokerage like Lightspeed or COBRA Trading. Here you pay higher monthly costs for maximum platform functionality, ultra-low latency order routing, and choice over matching different exchanges. This caters to very active traders focused on high-frequency strategies.

In the end, every trader needs to consider preferences around technology, trading style, and costs to determine the best fit.

Key takeaways: why ECNs will continue gaining prominence  

Considering everything we’ve covered, it’s clear why electronic communication networks offer such an efficient alternative to older forms of exchange trading:

  • They seamlessly connect buyers and sellers in an automated, virtual environment
  • They promote transparency around the true market price and liquidity dynamics
  • They reduce costs associated with intermediaries and outdated infrastructure

These practical advantages translate into major wins for participating traders, too: 

  • Retail investors gain access to robust platforms, low-latency trade execution, competitive market pricing, and around-the-clock accessibility. 
  • Large institutional traders benefit from being able to execute block orders anonymously while still interacting with broader supply and demand flows from other participants.  

Add in ongoing technology breakthroughs around machine learning, distributed ledgers, and cloud computing – and the appeal of ECNs becomes undeniable. In many ways, they provide the ideal gateway to the increasingly digital future of trading markets. The automation and flattening out of old silos unlock flexibility and opportunities that didn’t exist a decade ago.


The world is changing very fast, and new technology is making it possible for people to trade stocks and other investments online. But this also creates new challenges like rules, security risks, and a confusing market. Policymakers and regulators are trying to find ways to balance the risks with the benefits of this new technology. Despite these challenges, the use of electronic trading platforms is only going to grow as more people find it easy and convenient to use. Whether you are a professional or just a casual investor, it’s important to keep up with these changes and stay caught up. Electronic trading is the way of the future, and it’s time to embrace it!


What’s the main advantage of ECNs over traditional exchanges?

ECNs allow for faster, more seamless trading compared to old-school market floors. By electronically matching buy and sell orders, they cut down delays, which leads to quicker execution. This speed and efficiency appeal to active traders and investors.

Do I need advanced tech skills to start trading on an ECN platform? 

Not at all! Most online brokers now offer straightforward access to prominent ECNs. You log into your existing account and place orders like normal. Of course, power users can utilise speciality ECN software for sophisticated tools, charts and analytics if they choose.

As a small retail trader, will my orders get filled on an ECN?  

Absolutely – ECNs match large institutional orders right alongside those from individual investors. Your buy or sell order could be executed in tandem with a block trade from a hedge fund. Granular order types allow the matching of various trader sizes.

Is it risky to share my trading intel and strategies on an ECN network?

Not really. While the order book transparency allows you to see current market depth, your orders remain anonymous. Large traders often divide big orders across days or weeks without signalling plans.

Why do ECN transaction fees seem higher than my broker commissions? 

While cutting some costs, ECNs themselves charge monthly subscriber fees and small access charges per share. Power users trading millions of shares can rack up big platforms and market data bills. But occasional investors likely see net savings.

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