Electronic Communication Network (ECN)

ECN is a computerized trading system that facilitates the trading of financial products on exchanges. An ECN connects buyer and seller over a network governed by protocols that eliminate the need for an intermediary such as an intermediary broker or an investment bank. ECN allows individuals to come together and place direct orders almost instantly regardless of geographic location.

To place orders directly with an ECN, a person must be an ECN subscriber. Typically, only brokers/dealers and institutional traders are allowed to become ECN subscribers. Individual investors must have an account with a broker/dealer subscriber to place an order on an ECN.

The benefit an investor gets from trading with an ECN includes after-hours trading, anonymity, lower transaction cost, and giving clients full access to their order books.

Instinet was the first ECN used in 1969, and it was used by market makers for Nasdaq trades.  It internally matched buy and sell orders that represent the highest bid and lowest ask price in the open market.