What Does ECN Stand For?

ECNs are computer systems used to match and execute stock market buy and sell orders.

Buying and selling stock was once done by an elite group of brokers and trades were manually carried out. Today, technology brings trading to everyone who has a computer and Internet access. The NASDAQ stock exchange, created in 1971, was one of the first electronic marketplaces where buy and sell transactions are processed electronically.

The Function of ECNs

The term Electronic Communication Networks, or ECNs, generally refers to computer systems used to facilitate the buying and selling of stocks and currencies. The idea behind ECNs is to provide a trading system that eliminates a third party in the trading process. Buy and sell orders among subscribers are entered and executed automatically through the ECN system.

Benefits And Disadvantages

The benefit of using an ECN to buy and sell stock is that it enables members to trade directly with each other and avoid a middleman. Also, ECN subscribers have the benefit of being able to trade "after hours," that is, during times other than when the traditional Wall Street stock exchanges hold hours, which is usually 9:30 a.m. to 4 p.m. Eastern Standard Time. However, because ECNs match buy and sell orders at specific prices, when there isn't a sell order to match a buy order, the trade does not get executed.

Users Of ECNs

Subscribers to ECNs are market-makers, large institutional investors and broker-dealers. A market-maker is a brokerage firm that holds an inventory of specific stocks, displays buy and sell prices and processes orders using its own resources. In order for an individual investor to use an ECN, he or she must open an account with a broker-dealer who is an ECN subscriber.

References

• Investopedia: Electronic Communication Network
• U.S. Security & Exchange Commission: Electronic Communication Networks