When it comes to stocks, there are many ways to diversify your portfolio. Sometimes, you don’t even have to go the route of the traditional stock market. Instead, you can trade through what are known as electronic communication networks. Keep reading to find out if this is the right trading system for you.
What Is an Electronic Communication Network?
An electronic communication network (or ECN) is an alternative trading system that takes place outside of traditional stock exchanges and markets. These ECNs are computerized and automatic, meaning each system connects buyers and sellers without the use of a middleman or intermediary broker. For a fee per transaction, an ECN will conduct limit orders – primarily stocks or currencies through the foreign exchange market.
What’s the Process of Using an ECN?
After signing up for an account with an electronic communication network, investors enter in their orders. The computer system then gathers quotes from different participants and identifies the best available bid.
From there, trades are matched automatically and (usually) anonymously. These orders are generally limit orders. If an order cannot be matched, they will be placed in a list for other investors to manually view and interact with.
While ECNs exist to eliminate middleman brokers and streamline the process, they can still offer many features that allow for nuance. For example, many platforms facilitate negotiation, including auctions and arguments for counter-offers. They can also provide an incredible amount of real-time market trend data and information, as opposed to desk-dealing brokers who may withhold information.
Those involved with Forex trading (trading currencies on the foreign exchange market) may be quite familiar with ECNs, as they are suitable for instant global transactions and tighter spreads. Investors dealing with securities or currencies that experience a lot of volatility tend to find value in these instant communications.
What Are the Pros and Cons?
ECNs are quite popular among those seeking to trade through non-exchange entities. However, they have their benefits and downfalls.
The most common advantages of using ECNs are:
- Direct access trading without the extra step of an intermediary
- Ability to conduct trades at any time of day in any location
- Convenient and time-saving for those without the means to devote to full-time trading
- Generally lower spreads than with traditional brokers
- No conflict-of-interest (ECNs will not take positions against users)
However, some disadvantages include:
- Fixed transactional fees, which vary between networks and may impact profitability depending on the nature of each trade
- Trades tend to be limited to those only within the network (though some collaborate with other ECNs to expand trading pools)
- Low user-friendliness on some platforms
Electronic communication networks automate the trading experience and remove the ‘human element’ of a broker or investment bank. This can be a positive or negative depending on individual preferences. However, many find ECNs attractive for their increased opportunities for profitability through their smaller spreads and elimination of conflicts-of-interest.
Ultimately, ECNs very well suited for smaller investors who are unable to trade during regular market hours or want to deal in the foreign currency exchange market.
Although Easy Stock Loans is not a broker, we’re happy to discuss any questions you may have about the surrounding aspects of the stock market and trading process. Just give us a call and a member of our team can tell you all you need to know.