Electronic Communications Network (ECN)
An automated trading system that matches buy and sell orders directly without a traditional market maker.
What is ECN?
An electronic communications network (ECN) is an automated electronic system that directly matches buy and sell orders for securities without requiring a traditional market maker as an intermediary. ECNs display the best available bid and ask quotes from multiple market participants and execute trades automatically when orders match. They operate as alternative trading systems (ATS) registered with the SEC and are popular for extended-hours trading, providing greater price transparency and often lower transaction costs than dealer markets. Major ECNs include Instinet, BATS (now Cboe), and NYSE Arca. ECNs democratized market access by enabling institutional and retail investors to trade directly against each other, bypassing dealer spreads.
Example
Before ECNs, a retail investor wanting to buy 500 shares of Microsoft after 4:00 PM ET would be unable to do so on traditional exchanges. With ECN platforms, the investor can post a limit order that is matched directly against another investor willing to sell at the same price in after-hours trading, avoiding a market-maker spread. Instinet, founded in 1969, was the first ECN and originally served institutional block traders.