What comes to your mind when someone mentions ‘ECNs’? Stock exchanges? NYSE and NASDAQ? Prior to reading Scott Patterson’s Dark Pools, I knew very little about Alternate Trading Systems (ATS) and how famous public exchanges such as NYSE and NASDAQ came to be. This post is not meant to be a detailed history of (US) trading venues but instead to provide you with a brief overview of different ECNs that exist or existed and how they led to today’s behemoth trading venues.
What are ECNs?
ECN stands for electronic communication network. An ECN is an automated system where client orders are matched. ECNs eliminate the need to interact with a middleman, such as an exchange market maker, to buy or sell securities. ECNs earn money by charging users a fee for each transaction. While public exchanges have fixed hours dedicated to trading, ECNs are usually open 24 hours and hence, facilitate after-hours trading.