The financial market is a dynamic ecosystem that processes trillions of trades on a daily basis. work through Matching buyers and sellers in the market.
Mediators use different methods. For example, most US brokers use the extension Payment for order flow (PFof) where Orders are executed by a small group of market makers.
One such tool is electronic communication networks. In this article we will explain what ECN It is, the pros and cons and how it works.
As the name suggests, an electronic communication network It is a network that matches buyers and sellers for securities in the market. It is a complex network that handles hundreds of billions of dollars worth of deals every day.
The system consolidates market activity from hundreds of other companies. As a result, she is able to Offer narrow spreadswhich leads to lower fees.
In short, ECN is a complex network Connects most brokers in the industry. It serves as The market maker that matches these orders. By doing this, the system can handle more trades per day and at a lower cost per trade.
ECN is different From the model used by US companies such as Robinhood and Schwab to execute their orders. These companies use the PFOF model, which includes market makers such as Virtu Finance and Citadel Securities.
US brokers are also turning to ECN in their daily operations. Since the stock market closes in the afternoon, companies turn to electronic networking during long hours and pre-market sessions. Only limit orders are allowed in these periods.
An ECN broker is a company that provides its services using the model described above. These companies do not depend on market makers. Instead, they rely on a complete communications technology system that connects many brokerage firms.
And unlike PFOF, ECN technology cannot trade against a trader.
A common criticism of paying for order flow is that it allows high-frequency traders to open positions in the opposite direction of the trader. as a result of, PFOF can process trades at the expense of merchants.
This is one of the main reasons why many regulators are working to change the paradigm. Some of the best ECN brokers are FxProAnd I.Gand EasyMarkets.
Related “ What is high frequency trading?
Examples of leading ECN companies
There are many such companies in developed countries. NYSE Arca It is one of the oldest players in the industry. Another example is instantnetwhich is a company Owned by Nomuraa giant Japanese banking group.
Other companies in the industry are Deutsche Bank, Patsand LiquidNet. BATS is owned by CBOE Global.
There is a big difference between electronic communication networks and market makers. As described above (and below), a ECN is a complex communication system Which connects different trading venues and displays the prices of major assets such as stocks and commodities.
On the other hand, prof A market maker is a company that buys thousands of assets and then fulfills their supply to brokers. They are also known as wholesalers because they own thousands of stocks, including those that are poorly traded. Market makers make money from the bid and ask price spread.
Citadel Securities has the largest market share in the market making industry in the United States. In 2022, the company generated more than $7 billion in revenue. It is followed by Virtu Financial, a company valued at more than $3 billion.
Other leading companies in the industry are Jane Street, Susquehanna, and others.
An electronic communication network is usually a complex system Designed by some of the largest financial services companies in the finance industry. They are mostly operated by big companies like Nomura and Deutsche Bank.
These companies design their own ECNs and then Sell their systems to brokerage firms. The brokerage firms then display the best rates offered by the telecom.
Prices are usually presented in the form of bid and ask prices. Bid is the highest price a person is willing to pay for a financial asset while Ask is the maximum price a seller is willing to sell. the The difference between the two is known as the spread And what brokerage firms earn as profits.
The diagram below shows how an electronic communication network system works. ECNs get their prices by looking at all orders entering the system.
There are many advantages to using an ECN broker. First, because of its global nature, ECNs have great liquidityWhich means Their implementation costs are relatively minimal compared to other companies. as a result of, Traders here often see lower fees.
Secondly, they are too work longer. For example, in the United States, brokers are able to offer extended trading hours using ECNs. This is it Impossible using market makers Because it is usually closed during that period.
Third, many ECN brokers are global entities It is not limited to some jurisdictions.
ECNs have several drawbacks. The most important drawback is that They only carry out specified commands when used in long hours. As such, you cannot open market orders in the initial market and after hours.
Another trick is that ECN brokers are often not allowed to operate in the United States. Finally, you It cannot have direct access to the market in these networks.
In this article, we looked at what ECNs are and how they work. We also looked at some of the main advantages and disadvantages of using these technologies and how they differ with other companies.
Also, we have identified some of the most important differences between these communication networks and market makers.