Electronic Communication Network

The alternative to the stock exchanges

Serious Information

Trivia
The information technology revolution has provided investors with new execution choices. Of special note are the recent growth of alternative trading systems known as Electronic Communications Networks ECNs and the increased opportunities for trading in the after-hours market.

.An electronic system that brings buyers and sellers together for the electronic Execution of Trade. An Electronic Communication Network (ECN) is a computer system facilitating trading of financial products outside stock exchanges. The primary products traded on ECNs are currencies and stocks. ECN's came into existence in 98 when the SEC authorized their creation. Electronic Communications Networks (ECNs) represent orders in Nasdaq stocks; they internally match Buy and Sell orders or represent the highest Bid prices and lowest Ask prices on the Open market.

To trade with an ECN, one must be a subscriber. ECN subscribers enter limit orders into the ECN, usually via a custom computer terminal or a direct dial-up. The ECN will post those orders on the system for other subscribers to view. The ECN will then match contra-side orders (i.e. a sell-order is "contra-side" to a buy-order with the same price and share count) for execution. Generally, the buyer and seller are anonymous, with the trade execution reports listing the ECN as the party. The benefits an investor gets from Trading with an ECN include After-hours trading, avoiding Market makers (and their spreads), and anonymity (which is often important for large trades).

Some ECNs offer additional features to subscribers such as negotiation or reserve size, and have access to the entire ECN book containing important real-time market data regarding depth of trading interest.

ECNs were created out of the Nasdaq Market Makers Antitrust Litigation led by lawyer William Lerach. The litigation alleged collusion between Wall Street traders, and was proven in 98, leading to a $1 billion settlement from Wall Street firms. At the time of the settlement, the SEC also put in new regulations, the Limit Order Display Rule, which authorized electronic communication networks, ECNs.

Major ECNs that became active at this time were Instinet and Island, (which were since merged into INET and acquired by NASDAQ), Archipelago Exchange (which acquired the NYSE), and Brut (now acquired by NASDAQ). ECNs increased competition amongst trading firms by lowering transaction costs, giving clients full access to their order books, and offering order matching outside of traditional exchange hours.

Since 98, banks have been developing proprietary systems for customers to trade foreign exchange and access research material over the net. To trade with multiple banks online, customers therefore need to use a variety of authentication methods, websites and price request methods. Multi-bank platforms have evolved to allow customers a single website to request prices simultaneously from multiple banks and view research material online. Multi-bank platforms (also known as ECNs or electronic communication networks) offer significant advantages to customers, but fewer advantages to banks, and therefore active participation by banks in multi-bank platforms is driven largely via customer demand. However, for banks it remains preferable for customers to trade through bank proprietary systems as the banks avoid paying brokerage and customers are encouraged to focus only on particular bank's prices.

One of the largest ECNs, Instinet Corp., initially established its market niche in the 1970s by providing after-hours services to institutional and professional traders. ECNs have sought an increasing role in after-hours trading by retail investors.

There are five main FX ECNs:

FXall - founded by Bank of America, Credit Suisse First Boston, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley Dean Witter and UBS
Currenex - independent and venture backed by major market participants, e.g. Barclays Capital and Royal Dutch/Shell
FX Connect - owned by State Street
360T - independent and venture backed by financial and major private investors
Hotspot FXi - independent privately held venture capital-backed company

When NASDAQ celebrated it's thirtieth birthday there wer eorries that ECN's were eating into the profit. The Electronic Communications Networks automatically match buyers and sellers, cutting out the middlemen. The original ECNs were set up partly in response to Nasdaq members' reluctance to always advertise their best bids and offers.

In 2001 Instinet, the electronic stock trading network was floated by Reuters Group, the news and financial information firm. Then in 2002 it paid more than half a billion dollars for its rival Island. For some time, Reuters - which still owns 83% of Instinet - had been expected either to take the company private again or arrange a merger with a rival.

In 2001 the stockmarket flotation of Reuters' electronic stock trading network Instinet has raised much more money than even the most optimistic analysts had predicted.

"Wall Street giants challenge exchanges": In 1999 the BBC reported that Wall Street giants Merrill Lynch and Goldman Sachs Group were to develop an electronic stock trading system to compete with traditional US stock exchanges. A re-evaluation of exchanges' traditional structure, in which each exchange regulates itself, is being prompted by the proliferation of electronic communication networks, ECNs. In 1999 SEC Chairman Mr. Levitt was seeking advice from scores of experts. He relied most on a kitchen cabinet that includes former Treasury Secretary Robert Rubin; former Deputy Secretary of State John Whitehead; investment legend Warren Buffett; and three Wall Street chiefs: David Komansky of Merrill Lynch & Co., Philip Purcell of Morgan Stanley Dean Witter & Co. and Henry Paulson of Goldman Sachs Group Inc.

The future of stock trading is electronic, seemingly pitting the remaining traditional New York Stock Exchange specialist system against the relatively new, all Electronic Communications Networks, or ECNs. ECNs extol speedy execution of block trades, while specialist system proponents cite a role of specialists in maintaining orderly markets, especially under extraordinary conditions or for special types of orders.

ECNs contend an array of special interests profits at expense of investors from even the most mundane exchange-directed trades. Machine based systems, are said to be much more efficient, improving the traditional execution mechanism and eliminating the requirement of dealing with an intermediary.

Trivia

ECNs are used for other information techniques such as weather reporting.

ECN is a common acronym for many groups such as 1)EUROPEAN COMPOST NETWORK, 2)The Environmental Change Network (ECN) is the UK's long-term environmental monitoring programme. 3)European Chemical News,

On the internet there is an advert for a Real-Time ECN for SPORT, giving info on sport.

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