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Electronic Communication Network. ECNs bring buyers and sellers together for electronic execution of trades. The SEC has defined an ECN as any electronic system that widely disseminates to third parties orders entered into it by an exchange market maker or over-the-counter ("OTC") market maker, and permits such orders to be executed in whole or in part.
The definition specifically excludes internal broker-dealer order-routing systems and crossing systems i.e., systems that cross multiple orders at a single price set by the ECN and that do not allow orders to be crossed or executed against directly by participants outside of the specified times. There currently are nine ECNs operating in US securities markets: Instinet, Island, Bloomberg Tradebook, Archipelago, REDIBook, Strike, Attain, NexTrade, Market XT, and GFI Securities.
ECNs have a wide variety of subscribers, including retail investors, institutional investors, market makers, and other broker-dealers. ECNs provide many market services to these subscribers. For example, ECN subscribers can 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 for execution. In most cases, the buyer and seller remain anonymous to each other, with the trade execution reports listing the ECN as the contra-side party. In addition, subscribers may use such features as negotiation or reserve size,13 and may have access to the entire ECN book (as opposed to the "top of the book") that contains important real-time market data regarding depth of trading interest.14
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