Electronic Communication Networks (ECNs)

Electronic Communications Networks, or ECNs, are electronic trading systems that automatically match buy and sell orders at specified prices. ECNs register with the SEC as broker-dealers.

Those who subscribe to ECNs – institutional investors, broker-dealers, and market-makers – can place trades directly with an ECN. Individual investors must currently have an account with a broker-dealer subscriber before their orders can be routed to an ECN for execution. When seeking to buy or sell securities, ECN subscribers typically use limit orders. ECNs post orders on their systems for other subscribers to view. The ECN will then automatically match orders for execution.

If a subscriber wants to buy a stock through an ECN, but there are no sell orders to match the buy order, the order can't be executed until a matching sell order comes in. If the order is placed through an ECN during regular trading hours, an ECN that can't find a match may send the order to another market center for execution.

To learn more about the basics of trade execution – including order routing, payment-for-order-flow, and internalization – you should read Trade Execution: What Every Investor Should Know. You can also read a special study prepared by the staff of the SEC that discusses the impact of ECNs and after-hours trading on the securities markets.