Electronic Communication Network (ECN)
What it is:
Commonly known as an ECN, an electronic communication network is a system for trading financial instruments that takes place outside of the markets and is sanctioned by the Securities and Exchange Commission (SEC). An ECN connects buyers and sellers over a network that eliminates the need for an intermediary such as a broker or investment bank.
How it works (Example):
An ECN brings together buyers and sellers of financial instruments and enables them to trade available securities and currencies. The ECN is the intermediary and charges either transaction fees per share or amount traded, or automatically adjusts prices slightly up or down, profiting from the price difference.
The Nasdaq market is an example of an ECN. Rather than a physical location such as the New York Stock Exchange, the Nasdaq is a network of securities traders who engage and trade directly with one another.
Currency trading also takes place on an ECN. Spot trades can be made almost immediately, and the trading platform allows the trader to view all of the currency available for trading along with the associated prices and price changes.
Why it Matters:
Electronic communication networks allow individuals to communicate almost instantly regardless of geographic location. This makes ECNs an effective way for individuals to come together and make direct trades. ECNs have also made the financial markets more efficient and more global.