Ecn
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Not to be confused with stp, ecn account, ecn broker.
ECN stands for electronic communications network, a type of trading venue that electronically matches orders from many participants without a central dealer setting the price. Originally developed for equities, ECNs are now common in foreign exchange and other markets, where they allow banks, funds, and retail traders to interact in a single order book. The defining feature is that executable prices come from the best available resting orders, not from a quote stream supplied by one counterparty.
How an ECN operates
An ECN collects limit orders from its participants into a central order book. Incoming market orders are matched against the best opposing limit order, and any remainder either rests in the book or is cancelled, depending on the order type. Because multiple participants post prices, the best bid and best offer at any moment reflect competition among them.
Access is usually through a trading platform or an application programming interface. The operator charges a commission or fee for matching trades, and may also earn from data or connectivity services. The specific fee schedule, order types, and eligible participants vary by venue and jurisdiction.
Worked example: matching on an ECN
Suppose an ECN's order book for a currency pair shows the following resting limit orders. A market buy order for 300,000 units arrives.
The buyer receives an average price of 1.105033, which is worse than the best offer because the order consumed two price levels. This slippage is a normal consequence of order-book depth, not a dealer markup.
What an ECN is not
An ECN is not a market maker or a dealing desk. It does not take the opposite side of a client's trade, and it does not set a bid-offer spread by policy. Instead, the spread emerges from the difference between the best resting buy and sell orders. If liquidity is thin, that spread can widen sharply, and large orders may move the price.
Regulatory treatment of ECNs differs by country. In some jurisdictions an ECN must register as an exchange or a multilateral trading facility; in others it operates under a different licence category. Participants should check the venue's rulebook and the applicable local regime.
Often confused with
- stp
- An STP (straight-through processing) venue routes client orders to external liquidity providers but does not operate a central matching book, so trades are executed against those providers rather than against other clients; the visible sign is that an STP shows a single stream of quotes from its providers, while an ECN shows an aggregated order book with depth.
- ecn account
- An ECN account is a retail account type that gives access to an ECN venue, usually with commission-based pricing, whereas an ECN is the venue itself; the visible sign is that the account appears on a broker's product list, while the ECN is the matching system behind it.
- ecn broker
- An ECN broker is a firm that provides clients with access to an ECN, while an ECN is the underlying electronic matching network; the visible sign is that the broker is a company with a licence and client agreements, whereas the ECN is the trading venue those agreements connect to.