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An ECN is “any electronic system that widely disseminates to third parties orders entered by an exchange market or OTC market maker, and permits such orders to be executed against in whole or in part...”. That’s what SEC Rule 11Ac1-1(a)(8) says. ECNs are the most important tools for order executions for a daytrader because they offer a lot of advantages. Be sure that you know them well. ECNs are privately owned. They match limit orders and, unlike market makers, do not profit from a spread. Traders can execute trades without the help of a market maker. If someone wants to buy a stock at 50 and another one wants to sell it at 50, both orders are matched within the ECN. Instinet was the only ECN until 1998. It’s used by institutions and market makers trading anonymously through this system. Instinet is still he biggest ECN but it’s losing ground because more and more other ECNs come into existence. There are several different ECNs today and their numbers are growing. ECN executions are generally very fast and therefore heavily used by short term traders. ECNs show up in the Level II screen side by side with the market makers. Each ECN has its unique identifier, a four digit symbol. Current ECNs are: INCA: Instinet Every ECN has its own rules about how it handles order flow and execution. Some ECNs have higher liquidity than others, some are faster than others, some accept odd lots, others do not etc. You should know the basics of each ECN so that you can make a proper decision for your order routing. At least you should know the symbols of all the ECNs so that you don’t mix them up with market makers. In
this book we especially focus on INCA, ISLD and TNTO/ARCA because
these are the mainly used ECNs by daytraders. Table of Contents |
