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ECNs and the Equities Market For equities, ECN's exist as a class of SEC permitted Alternative Trading Systems (" ATS ". As an ATS, ECNs exclude broker-dealers' internal crossing systems – i.e., systems that match orders at the broker-dealer using prices from an exchange, without actually sending the order to a public venue. ECNs were born out of the Nasdaq Market Makers Antitrust Litigation led by lawyer William Lerach. The litigation alleged collusion between Wall Street traders, and was proven in 1998, leading to a $1 billion settlement from major Wall Street firms. At the time of the settlement, the SEC also put in a new regulation, the Limit Order Display Rule (rule 11Ac1-4), which authorized "electronic communication networks," or ECNs. Major ECNs that became active at this time were Instinet and Island, (which were since merged into INET and acquired by NASDAQ ), Archipelago Exchange (which acquired the NYSE ), and Brut (now acquired by NASDAQ ). By 2001, 50% of OTC trading was done through ECNs. ECNs increased competition amongst trading firms by lowering transaction costs, giving clients full access to their order books, and offering order matching outside of traditional exchange hours. How ECNs Work In order to trade with an ECN, one must be a subscriber. 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 (ie, a sell-order is "contra-side" to a buy-order with the with the same price and share count) for execution. Generally, the buyer and seller are anonymous, with the trade execution reports listing the ECN as the party. Some ECNs may offer additional features to subscribers such as negotiation or reserve size, 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. ECNs and the FX Market By trading through an ECN an FX client generally gets a better price than trading by voice over the phone. Other benefits are greater price Transparency , faster processing, increased Liquidity and more availability in the marketplace. The banks also lower their costs as there is less manual involvement. EXTERNAL LINKS
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