Main - Article - ECN – Electronic Communication Network (ARCA,BATS,NSDQ,EDGA,ISLD,SDOT)
Electronic Communication Network (ECN) — electronic system transactions of purchase and sale of commodities, trying to eliminate the role of intermediaries. ECN connects the leading brokers and individual traders among themselves, so they can trade directly, bypassing the exchanges intermediaries.
For a trader, using the services of direct online access to exchange trading, care, what is electronic communication network (electronic communication network, ECN) provided. Some ECN to provide greater flexibility in operations, others offer the possibility of high-speed sending orders, third direct orders as the Nasdaq market, and on the NYSE. Thus, with a number of similar characteristics, electronic communication network have quite significant differences.
So, what is electronic communication network? ECN – is a computer network, which allow to do without the market makers and directly link buyers and sellers of securities. In order to access the ECN, the investor must enter into an agreement with a broker, which has partnered with at least one ECN. Such brokers are called “brokers with direct access”, because they provide direct access to computer networks.
Active traders love ECN network, since the latter give the ability to send restraining orders within the spread between the bid and asking price, supported by market makers.
Individual traders are not the only users of ECN. Many institutional investors are also sending their orders through the system. According to This Stiffler (Dana Stiffler), an analyst from financial research firm Meridien Research, for operations using network ECN accounts for about 34% from all operations, held at the Nasdaq.
At the moment there are not less than 11 ECN: Attain, Archipelago, Bloomberg Tradebook, Brut, Instinet, Island, Posit, MarketXT.com, NexTrade, RediBook and Tradepoint, moreover, the methods of processing orders, each of them slightly different. Of course, what is different and the fees, who make up between a quarter and a penny or more per share.
Four network – Instinet, Island, Archipelago and RediBook account for about 85% operations, executed through ECN. The active trader is not even considering any other options, because liquidity in this matter plays a big role: if the investor cannot find a sufficient number of proposals, satisfy his requirements, it will have less chances to make a bargain.
History of ECN
In January 1997 year SEC adopted new Rules for the processing and execution of orders (Order Handling Rules), which completely changed the ways of trading in securities on the market Nasdaq. The new rules gave the chance electronic trading systems (Electronic Communications Networks, ECNs) direct access to the National market system of Nasdaq.
The term ECN is used to define any electronic system, which provides investors with access to information about orders, entered in the ECN working at the exchange or OTC market makers and allows you to execute these orders against each other completely or partially.
ECN is a special case of ATS (Alternative Trading System – alternative trading system) and they were created for processing and execution of limit orders, which could not be executed onthe stock market until then, while the price does not become a market.
All orders, entered in the ECN, come in a single order book, a distributed database. At the heart of any ECN lies the system of “selection of the relevant orders” (order matching system), to automatically do the opposite (purchase and sale) orders at the coincidence of their some parameters (asset, price, the number).
ECN apply to electronic trading systems with direct access, ie. through this system the order, and on behalf of the client, directly marketed. This is the main difference between ECN online broker, which stands in the way of orders to the market intermediary, handles order in your internal system and outputs it to the market on his behalf.
Known, what market makers earn on the difference between the prices of purchase and sale, the so-called spread. ECN give you the opportunity to trade “within the spread”, by charging per transaction fixed fee. Thus, ECN not only save costs for investors, but also increase the speed of execution of their orders.
Along with low prices another advantage of ECN is the ability to clock trading. The emergence of a broad class of individual investors led to the need to increase trading session and even go to round-the-clock trading, to meet the demand of investors in other time zones. So the clock trade is seen as a competitive advantage ECN, able to increase the influx of customers without additional costs. A similar opportunity for traditional exchange would be fraught with far greater costs, associated with the maintenance of a huge infrastructure.
The third attractive factor ECN is their openness to investors, who previously had no direct access to trading and could not compete with brokers-dealers. Today, investors ' orders through the ECN appear on the market and can affect its dynamics.
And, finally, ECN is characterized by transparency, ie. all submitted orders are recorded in the system, and the information on them is available to all participants-subscribers. In addition, the best application gets to the market (on a specific trading platform) on behalf of ESP, having the status of the market-maker.
One of the main problems of Internet Commerce is the technology market access, imperfect, if allowed the opportunity of open communication, and the latter does not happen often, because most individual investors work at home using regular dial-up telephone line.
In addition to the loss of time, spent to restart the system, can lead to loss of entered data, resulting in a client order is not executed or executed twice. In addition, access to information and trading systems online brokers is via common Web browsers, for example, Internet Explorer, that does not guarantee after the restart when the system returns to the state, failure.
In fact, customer orders are sent online to the broker by e-mail. Then the orders are processed in the internal system of an online broker and forwarded for execution to one of the trading platforms.
Alternative trading systems operate independently from Web browsers, and do not use the HTML-Protocol. They provide their members-subscribers access to information and trading on various platforms through a special software. Thus, technology ATS is more speed and more reliability in that, with regard to the processing and execution of orders, in addition, it provides automatic reconnection with the return of the system to exist at the time of failure as.
From April 1999. entered into force new rules and amendments to regulation ATS, defining the procedure for registration and operation of electronic trading systems.
In the last few years the SEC has undertaken a revision of its concept of regulation of the stock market due to significant changes in the way securities trading. Market participants in its activities, began to apply new technologies, designed to expand the range, quality and price component provided to investors services. In particular, market participants have developed various alternative trading system, providing services, which are traditionally the exclusive prerogative of the registered stock exchanges.
Currently, alternative trading system accounts for about 30% orders for securities, quoted on the Nasdaq Stock Market (“Nasdaq“), and almost 7% orders for securities, included in the listing stock exchanges. In the near future ATS can become a major market for certain categories of securities. So far, this is private trading system, available only to members-the members and regulated as broker/dealers,, and not as a registered stock exchange and Nasdaq.
The national system stock markets in the United States was conceived on the principles of centralization, liquidity and competition. Long time ATS remained outside the national market system and was beyond the control of regulators, that created discriminatory conditions for ordinary investors and pave the way to abuses, fraud and price manipulation. So the SEC decided to fill a gap in the legislation, as ATS have become serious competitors for the traditional exchanges, not falling at the same time under the regulation for stock exchanges.
One of the main introduced in April 1999. the changes affected the definition of “exchange” (new rule 3b-16). The traditional definition was “the place for tender or a set of tools and opportunities for bringing together buyers and sellers of securities or for the exercise of other functions in respect of the securities, traditionally performed by stock exchanges”
A new definition of “exchange” began to sound so:
“any organization, Association or group of persons, which:
brings together orders of multiple buyers and sellers;
uses strict mandatory rules (through the provision of opportunities to trade or through the establishment of rules), on the basis of which these orders interact with each other, and buyers and sellers, placing these orders, agree to abide by the terms of the transactions”.
To date, the laws allow most alternative trading systems the choice between registering as an exchange and registration as a broker/dealer, choice, to determine the applicable law. However, trading system, exercising the functions of self-regulation, will not be permitted to register as a broker/dealer.
In addition, The Commission may decide, what is dominant in the market of the electronic trading system should be registered as an exchange. When the volume of trading in the ATS exceeds a certain level, The Commission may enter into, its exemption from regulation as exchanges are not in the interests of society or the protection of investors.
The name of the ECN
The owners (share ownership in the %)
Opening hours(Eastern time)
Acquired Reuters Group PLC (100) in 1987.
The bulk of institutional investors. Access to private investors is possible through discount brokers
Goldman Sachs Group (12,4); Instinet (12,4); Merrill Lynch (12,4); J. P. Morgan/ American Century (12,4); Townsend Analytics (12,4);
Southwest Securities (1)
Professional participants. Access to private investors through the trading system Trader MB, AB Watley, Polar Trading
BRUT (BRASS Utility)
Sunguard Data Systems (56);Knight/Trimark Group (14);Merrill Lynch (10);
Morgan Stanley Dean Witter (10);
Goldman Sachs Group (10)
Participants in the OTC market
John Schaible; Mark Yegge (the founders)
Access to private investors through registered brokers having access to the network
around the clock
All-Tech Investment Group, Inc. (100)
Access to private investors through registered brokers having access to the network
24 owner, including Bear, Stearns & Co; Lehman Brothers Holdings; Paine Webber; Donaldson, Lufkin & Jenrette; Salomon Smith Barney and others.
Access to private investors through registered brokers having access to the network
Instinet (INCA) the first ECN, belongs to the Agency Reuters, started to work in 1969. Initially, Instinet was only serviced by financial institutions, who wanted to trade with other financial institutions. Later, some brokerage firms were also allowed to use this network. Since the emergence of the Instinet system was considered as a separate trading system for institutional investors and brokerage houses, this gave a clear advantage of a closed group of professional market participants and was at odds with the rules and regulations of the Securities Commission, USA. Until now, Instinet does not allow for trading to individual traders. However, this situation, most likely, will change in the coming months, after the website is launched Instinet.com, designed for private investors. On Instinet accounts for about 40% from the volume of transactions, made through all ECN, therefore, Instinet provides the highest level of liquidity. Instinet also provides its customers with the ability to conduct operations by about 40 stock markets around the world. And since the earth is round and different stock exchange traded at different times, traders have the opportunity to participate in trading on the stock markets through Instinet at any time of the day.
In addition, which Instinet provides the highest level of liquidity, there are other reasons, which traders may prefer this system. Instinet provides its customers with the ability to conduct operations by about 40 stock markets around the world. This means, American investors can buy shares of foreign companies directly, instead of purchasing American Depositary receipts, ADR, for these shares on US exchanges. In addition, traders, suffering from insomnia, have the opportunity to participate in trading through Instinet at any time of the day.
Network Island, which accounts for about 20% trading volume in electronic systems, it occupies the second place in the rankings ECN. She is currently looking for opportunities to expand, trying to attract institutional traders and provide access to foreign exchanges. However, while a system of Island use, basically, “legions” individual traders, leading active operations in the stock market. Many traders carry out at the Island all day, buying and selling volatile stock of technology companies.
Book orders Island largely similar to the quotes system the second level of the Nasdaq (Nasdaq Level II quote system). Suggestions about buying and selling represented next to each other, and they are arranged depending on offer price, starting with the best. But unlike systems Nasdaq Level II, the cost of access which is $50 per month, book orders Island is free. Another advantage of the Island is its accessibility. Almost every “broker direct access” performs the operation through this network. One of such firms is Datek.com, a subsidiary brokerage firm Island. Datek provides its customers
Network Island (ISLD) — was founded in 1996 to ensure all market participants (from private investors to institutional) the ability to trade with the lowest costs, without intermediaries and dealers. Island – member of the National Association of Securities Dealers (NASD) and Corporations for the protection of investors in securities (Securities Investor Protection Corporation (SIPC)). The advantage of the Island is its accessibility. Almost every “broker direct access” trade offers through this network. Currently it accounts for about 20% trading volume in the ECN.
REDIBook — REDI Products was created to carry out e-Commerce options, futures, shares on the stock exchanges and in the OTC market and started with REDI Classic Dot system in 1992 year, designed for traders SLK and individual clients. REDI Products later developed software interface, which is currently known as REDIPlus. It allows access to the major exchanges, which are trade stocks and options, on the Nasdaq, REDIBook ECN. The volume of trading through REDIBook — 70 million. shares on the day. Through it on the NYSE and AMEX gets the greatest number of electronic orders. REDIBook ECN currently offers the extended trading session for certain shares of NYSE and AMEX. Additional hours stock trading installed with 8:00 to 9:15 ET and 16:15 to 22:00 ET. Orders in NASDAQ securities may be exhibited in SelectNet from 8:00 to 18:30 ET and Island with 8:45 to 18:00 EM. Since 18:30 to 10:00 ET "mixing" of orders occurs only between subscribers REDI. All orders, introduced after 16:00 EM, must be limit orders.
Archipelago (ARCA) one of the four ECN, the formation of which was approved by the SEC in January 1997 year. First secured the trade shares only on the NASDAQ. Currently, the network has access to other ECN and allows market participants to simultaneously interact with all ECN and market- makers. КлиентамиArchipelago are institutional investors, market makers NASDAQ, broker-dealers, individual investors. Being stock exchange, Archipelago unlike other ECN, can trade stock on national market (National Market System, NMS). The majority of the shares, included in listing of stock exchanges, traded on the NYSE, and only a very small number of them trading through the ECN network. This ensures Archipelago added advantage.
Archipelago provides clients communication with other ECN through the use of technology, called SmartBook. When a trader sends in Archipelago order, using SmartBook, the program first checks the ability to perform it in their own electronic system. If it does not find it necessary sentences, the order is automatically routed to another ECN or exchange, where can be buyers, offering the right price. Those, anyone familiar with the working methods “of brokers with direct access”, I can say, that SmartBook is no different from “smart” programs – routers orders, we offer the such online brokerage firms with direct access, as TradeCast.com, CyBerCorp.com and On-Site-Trading.com. But in fact there is a small, but, possible, quite a substantial difference. Program routers orders, used by many brokers with direct access, installed on your own PC clients. If they find the opportunity to make a deal, the order from the customer's computer is sent to the broker and then passed to the appropriate network ECN. If the connection for some reason is not fast enough, by the time, when the order reaches the destination, need offers can not be. When you use SmartBook deal is on a network server, while the program searches for the best possible prices. When this price was found, the server sends the order to the appropriate ECN, and immediately the transaction takes place. Network connections are faster SmartBook, as linking servers to each of Archipelago ECN is via high-speed backbone network.
It all sounds great, but there is one “but”. To use SmartBook, the investor must enter into an agreement with a broker, with direct access. And yet none of the leading traditional brokers not cooperating with the Archipelago (here you can see the list of brokers, working with Archipelago http://www.tradearca.com/company/broker_access.asp).
Tradebook ECN provides access to information and analytical resources of Bloomberg. Through it is securities trading NASDAQ. Within the system it is possible to hide the real size of the client's position (batch execution) or price, which must be fulfilled order. The customer is provided the opportunity to establish a range of prices, inside which can be filled with his application. Tradebook clients have access to other ECN.
NexTrade – was founded in 1990 and belongs to the Professional Investment Management . This is the first ECN predstavlyayushie 24 hour access to trading. Its customers mutual funds, hedge only, traders, market makers, traditional broker-dealers, online brokers and professional trading company. In 1990 year has passed official registration in the SEC as a fully functional trading network 24 hour access.
Network Instinet created by REUTERS Group in 1969 year, long before other ECN. Initially, Instinet was considered as a venue for large parties – financial institutions and brokerage houses. Due to the pressure of the SEC, the situation has changed: most orders placed Instinet on the NASDAQ. Private investors, having access to Level 2 quotes, can see orders and trades of this ECN to expose her own quotes through a broker. Instinet is not only the oldest, but the most liquid ECN. According to some estimates, through this network turns to 50% all transactions, committed in NASDAQ. In addition, here are traded stock listing New York Stock Exchange and American Exchange. Trading volume, on average, 700 – 800 million. shares on the day, ie. about 45% from the trading volume of all ECN. Instinet is, perhaps, the best system for institucionales and broker-dealers when trading large stakes in NASDAQ. Currently, the system is shown in NASDAQ Level 2 under the INCA index. Network Instinet – 1987 year property Reuters.
Network Island, introduced in 1996 year, focused, basically, for clients of online broker Datek and its owner company SmithWall Associates. Network users are more 300 brokerage firms, and private investors. It is presented at the level of 2 NASDAQ under the symbol ISLD. The share of the Island accounts for about 20% trading volume in electronic systems, thus it occupies the second place in the rankings ECN. In Island order 40% incoming orders are executed within the network. If this does not happen, the order is routed to other ECN, SOES and in the stock markets; the mixing of the orders does not depend on the number of shares in the lot. Island became the first network, offering discounts on placing orders, regardless of their further execution. The daily turnover of this network reaches 8 billion. stock.
Electronic network Archipelago established in December 1996 year to provide access for trading NASDAQ in accordance with new SEC rules, the Chicago company Terra Nova. The speed of the network equally provides institutionally, brokers and dealers, exposing its own applications, and private investors and clients of brokerage firms.
In July 2000 of the year, Archipelago and the Pacific Exchange have signed an agreement on establishment of a single, fully automated stock exchange shares New York Stock Exchange, American Stock Exchange and NASDAQ. After approval by the SEC the agreement entered into force. Archipelago provides clients communication with other ECN through the use of technology SmartBook (“smart” program router orders). Network connections are faster SmartBook, as linking servers to each of Archipelago ECN is via high-speed backbone network.
REDI or RediBook (The Routing and Execution Dot Interface) developed by Spear, Leeds & Kellogg (SLK), largest NYSE specialist, for electronic stock trading on the stock exchanges and the OTC market. Network clients get direct access to trading on NYSE, AMEX and NASDAQ. The company SLK attracted the founders of the three largest operators of the market – Fidelity Investments, DLG, Charles Sсhwab. Through this network showed a record growth rate of: if 1998 year market share REDI was 6,5%, now it owns 18% market ECN.
Trade 8:00 a.m. to 10:00 p.m. EST Monday to Friday. Clients of the system, as institutions, and professional traders, can trade in securities as at the usual time work NASDAQ, and before- and postmarket. During the bidding before and after the regular trading session it is possible to use limit orders.
SOES – system of execution of small orders. SOES trading system, designed for small private investors with direct access to Level 2 Group and NASDAQ market makers. She became the main trading tool for day traders (day-traders), dealing in volume 1000 shares of NASDAQ at the same time.
Traders, using SOES is restricted by the following rules:
the number of shares the warrant may not exceed 1000 pieces should be a multiple of 100;
the order can be executed only at a price, already existent on the market (Bid and Ask), ie. the opportunity to trade inside the spread, the trader is missing;
the bid and ask prices are set only by the market-makers;
apply only the market- and limit orders;
opening the following positions for the same stock in the same direction may not be less, than five minutes 5 minutes;
unexecuted for three minutes, the order is canceled.
SuperSOES. At the end of July 2001 the year, the NASDAQ Stock Market announced the successful commissioning of the new automated trading system SuperSOES. Now order at more than 3500 shares of NASDAQ are automatically executed using SuperSOES system. The first pilot phase of the project started 9 July 2001 g. After a week according to numerous requests of participants of trading in the stock list, accessible via SuperSOES, was included traditional favorites volume on the NASDAQ: Intel Corporation (INTC), Cisco Systems (CSCO), Dell Computer (DELL), Oracle Corporation (ORCL). And finally, 30 Jul SuperSOES becomes the main Executive system for all NASDAQ National stock Market (NNM).
Trading system SelectNet. In 1988 year the system of electronic filing and automatic confirmation of the transaction by the market-makers order Confirmation Translation service (OCT), which 1990 year was renamed SelectNet.In the end 2002 year improved, but at the same time and renamed SuperMontage. In fact, it combined system, SOES, and SelectNet.
The main difference between trading system, SelectNet is, that it allows traders to choose the best price not on the phone, and through the trading system of NASDAQ. This means, all traders, using this system, there is an opportunity when you enter an order to set a price inside the spread. Features SelectNet in many ways similar to ECN except for a few very important differences:
Your orders you can direct only market-makers.
You submit limit orders are not protected and can not be made due to lack of confirmation by the counterparties of transactions, ie they will not run automatically.
Orders on SelectNet channel can be routed as all market-makers immediately, and certain of them through the system preferences (preference). The choice is determined by the trader due to the lack of any right, or desire to use SOES to execute a transaction at the current price.
Trading system BTrade. The network started work in December 1996 year, is a member of NASD and SIPC. The owner participants Bloomberg''s Tradebook – provides users with a whole range of necessary information. BTrade provides financial institutions, brokerage agencies and market makers system of access to the stock market in the United States and 24 countries of the world. It implements functions, allows members to hide the real size of the position, either the price of the application, they want to enter the market. In addition, special option trading system allows the user to set the size of the spread, in which he agreed to the performance of your application, that increases the likelihood of its execution. Users can trade with each other within the network, and sweep the market with orders, which appear in other ECN, mainly in SelectNet.
Trading system STRIKE. This network, representing a new generation of ECN, began to operate only in the beginning 1999 year. Its software is based on JAVA-applets, uploading via the WEB, and runs on Windows NT and UNIX. The system is installed on servers, Sun Microsystem, having access to national communication networks. STRIKE is open to all credit institutions, professional investors, market makers and broker/dealers.
The network offers a flexible system of payment transactions executed. Like other ECN, to STRIKE pay a fixed Commission from each share (thus, total charge is proportional to the number of shares, involved in the transaction). However, STRIKE this Commission is reduced for large transactions. STRIKE in order to attract customers takes a Commission only for the executed transaction. The disadvantage of the network is the lack of developed analysis tools, for this we have to use other resources. The network has direct access to RediBook.
Trading system BRUT. The company's network BRASS Utility, L. L. C. it was created as a trading system for market makers, working on the OTC market OTC (Over The Counter Market). Most of the users BRUT are both members of the BRASS (Brokerage Real-Time System Applications). BRUT uses the datafeed from BRASS and actually complements it, in terms of functionality.
Trading system ATTAIN. A typical retail chain, created with the aim of attracting a greater number of individual investors and focused on day traders. Works mainly with the NASDAQ stock. To install the software you need is a personal computer with Pentium II, 64 MB of memory and is running Windows 95, 98 or NT. The order entry simplified. The network owner is the company All-Tech Securities, Inc.
Order, received from network clients, can be executed within the system, and beyond. The network is open for order entry from other broker/dealers and ECNs, but such orders, in contrast to customer orders, performed only inside the system. The network client receives a quality package of analytical support., including technical analysis. The datafeed is based on data from DBC (Broad Data Corporation), which is Attain a strategic agreement. The network has direct access to Island and Archipelago, Brut, Strike and Redi BOOK.
Trading system POSIT. Alternative trading system another type (not ECN), works on the principle-call (volley) auction. POSIT is a system, in which the crossing (netting) market orders 10:00, 11:30, 12:30, 13:30 and 15:00 at average prices, established currently on the market.
The advantages of ECN
Call a few of them: anonymity, automation, the speed and quality of execution of orders, low cost of use. Buyers and sellers of shares can put your orders through ECN without worrying, information about the affiliation of these orders will leak and may affect the “market” is a phenomenon known on wall Street as the “Effect name”. When trading through ECN the human factor is completely absent, so far the computer takes and serves the orders, and the computer does not spreading rumors. Automating the transmission and execution of orders, ECN not only speeds up the process, but also saves the money of investors, t. to. unlike the traditional route of the Broker – Market maker system of NASDAQ, ECN does not try to earn in excess of the Commission charged due to the difference between the execution price of a customer order and the real market price.
Today, many offer ECN trading before and after the day's market session. And while “pelerinaje” trading constantly expanded. Obviously, in the near future trade through the ECN will be -.
Source of income ECN
Usually ECN charge a fee either one, either both parties to the transaction. This fee varies from 0,25 cents to 3,5 cents per share. Some ECN initiatives to increase the volume of transactions (liquidity) do not charge from the other side, which initiates the transaction, but only to take the opposite side, which completes the transaction.
Disadvantages of ECN
Trade through the ECN extremely effective for a highly liquid stock, which are one-time orders for the purchase and sale, which significantly increases the likelihood of finding and matching counter orders. For less liquid stocks ECN significantly less functions as an electronic exchange, and sometimes it is preferable to send orders to a famous traditional market-makers system NASDAQ.
Obviously, even at high volumes of transactions for a specific share, not all have the same ECN high liquidity on that stock. The preference for more liquid ECN.