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Definition: ECN

ECN stands for electronic communications networks. ECNs are essentially computerized order matching systems and existing in the world of equities (stocks), futures, and currencies (read more about Forex here).

When an order to buy or sell a stock is sent to an ECN, the order is usually executed at a lightning-fast speed (less than a second is possible). Before regular investors and day traders could trade via ECNs, only institutions could do so through Instinet. This allowed institutions to buy and sell stocks outside of regular stock market hours (when most earnings announcements took place), while small investors could only sit and wait for the market to open.

This unfair scenario lasted until 1997, when an ECN by the name of Island finally opened its doors to the public. As a result of this and the creation of other ECNs, the stock trading landscape was changed forever. The growth in trading volume via ECNs has been so dramatic, that Instinet and traditional NASDAQ and NYSE order execution systems lost a significant amount of business due to it.

Due to their speedy executions and transparency, ECNs have always been day traders’ favorite choice when executing a stock trade. Even though the FX market is more liquid than the stock market, ECN systems to trade currencies have lagged behind stock ECNs. Nevertheless, in recent years forex ECNs and multi-liquidity systems have continued to pick up steam

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