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What are Electronic Communication Networks or ECNs?

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An Electronic Communication Network (ECN):- is a type of computerized forum or network that facilitates the trading of financial products outside of traditional stock exchanges. As a rule, an electronic system that widely distributes orders entered by market makers to third parties and allows full or partial fulfillment of orders.

The major products that are traded on ECN are stocks and currencies. ECNs are typically passive computer networks that internally correspond to limit orders and charge a minimal transaction fee per share (often a fraction of a cent per share).

What are Electronic Communication Networks or ECNs


Function

To trade using ECN, you need to be a subscriber or have an forex account with a broker that provides trading with direct access. ECN subscribers can log orders into ECN via a special computer terminal or network protocols.


The ECN matches the orders of the opposite party (i.e., the sell order is the "opposite" of the buy order with the same price and number of shares) for execution. ECN will place uncoordinated orders in the system for viewing by other subscribers.

As a rule, the buyer and seller are anonymous, and ECN is indicated as a party in the transaction execution reports.

Some ECN brokers may offer subscribers additional features such as negotiation, reserve size, and binding, and may have access to the entire ECN ledger (as opposed to the "top of the ledger"), which contains real-time market data regarding trading depth.

ECNs are usually supported by electronic negotiations, a type of communication between agents that allows a collaborative and competitive exchange of information to determine the appropriate price.

 Types of negotiations

  • The most common type is the electronic auction. As of 2005, most e-business negotiation systems can only support price negotiations. Traditional negotiations usually involve discussing other transaction attributes, such as delivery or payment terms. This one-dimensional approach is one of the reasons why electronic markets struggle for recognition. Multi-attributive and combinatorial auctions, some mechanisms allow for further negotiations. Supporting complex multi-attribute negotiations is a critical success factor for the next generation of electronic markets and, more generally, for all types of electronic exchanges.


  • And the second type of electronic negotiations is, namely, support for negotiations. While auctions are essentially mechanisms, bargaining is often the only choice in hard cases or in cases where there is no choice of partners. Bargaining is a complex, error-prone, ambiguous task, often performed in a short time. Information technology has some potential to facilitate negotiation processes that are analyzed in research projects/prototypes such as inspire, Negoisst, or Webns.

  • The third type of negotiation is automatic argumentation, in which agents exchange not only values, but also arguments of their proposals/counter-proposals. This requires agents to be able to reason about the mental state of other market participants.
1. Technologies

One area of research in which special attention is paid to the modeling of automatic negotiations is the study of autonomous agents. If negotiations frequently occur, perhaps every minute for network bandwidth planning, or if the topics of negotiations can be clearly defined, it may be desirable to automate this coordination.

Automatic negotiations are a key form of interaction in complex systems consisting of autonomous agents. Negotiations are the process of making proposals and counter-proposals in order to find an acceptable agreement. During negotiations, each proposal is based on its own usefulness and the expectation that the other. This means that for each proposal it is necessary to make decisions on several criteria.

2. on the stock market.

For exchange trading, ECNs exist as a class of permitted secs. Alternative trading systems (PBX). Like ATS, ECN excludes internal broker-dealers. Crossing networks - systems that match orders privately using prices on a public exchange. ECNs, as alternative trading systems, have intensified competition with institutional trading systems. Alternative trading systems have been found to have lower execution costs; however, with the advent of new ECNs, some of this cost reduction has disappeared. At the same time, it was found that the growth of ECN disrupts institutional trading. Analysis of the impact of ECN on NASDAQ (National Association of Securities Dealers Automated Quotations) showed "narrower spreads, greater depth and less concentrated markets." ECNs provide subscribers with historical orders and price data.

 As a result, ECNs compete due to their ability to attract "more informed orders" during "periods of high volume and yield volatility." Today, "ECN captures 40% of the volume of NASDAQ securities" and significantly changes the securities trading market.

ECNs affected the stock market by eliminating dealer functions when matching orders. With the automation of orders on a massive scale, the role of intermediary traders has been changed. Although ECN networks do not perform decision-making algorithms to the level of algorithmic trading, they have nevertheless influenced the role of human traders in the financial exchange.

3. Commission structure

The ECN commission structure can be grouped into two primary structures:

  • the classical structure
  • the credit (or discount) structure.

Both commission structures have their own advantages. The classical structure tends to attract individuals withdrawing liquidity, while the credit structure appeals to liquidity providers. However, since both removers and liquidity providers are needed to create a market, ECNs should carefully choose the structure of their commissions.

The ECN credit structure makes a profit by paying a loan liquidity providers while simultaneously charging a debit accounts that withdraw liquidity. Loans range from US$0.002 to US$0.00295 per share for liquidity providers and debits from US$0.0025 to US$0.003 per share for liquidity removal funds. A commission can be determined by the monthly volume of provided and remote transactions or by a fixed structure, depending on the ECN. This structure is common in the NASDAQ market. NASDAQ price list. Traders usually indicate commissions in millicents or miles (for example, 0.00295 dollars is 29.5 miles).

ECN will charge a small commission from all market participants using their network, both liquidity providers and implementers in the classical structure. They can also attract volume to their networks by offering lower prices to large liquidity providers. The commission for ECNs that work with the classical structure ranges from 0 to 0.0015 US dollars or even higher, depending on each ECN. This commission structure is more common in the NYSE. However, some ECNs have recently transferred their operations on the NYSE to a credit structure.

4. Currency trading

The first ECN for online currency trading was located in New York. Matchbox FX was formed in 1999. Then all prices were created and provided by traders/users of Matchbook FX, including banks, in its ECN network. 

At that time, it was quite unique. It gave the opportunity to the buyer's foreign exchange market participants, who historically always "take prices," and finally, to be price-setters. 

Today, several FX ECNs provide access to an electronic trading network, which receives quotes from the world's leading banks in real-time. Their matching mechanisms perform limit checks and order matching, usually in less than 100 milliseconds per order. The matching is determined by quotes, and these are the prices corresponding to all orders.

Spreads are discretionary, but in general, interbank competition creates spreads of 1-2 points for the main currencies of the US dollar and euro crosses. An order book is not a routing system that sends orders to individual market makers, and this is a livestock exchange type book that works against the best bid/offer of all quotes. Trading through ECN, a currency trader usually gets a higher price. Transparency, faster processing, increased liquidity, and greater market availability. Banks are also reducing their costs because using ECN for trading requires less manual effort.
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