Electronic Communication Network (ECN) Definition
ECN stands for Electronic Communication Network. While this term sounds awfully generic and logically could even be used to describe pretty much any form of communication in this day and age, it does have a specific meaning in the capital markets world. An ECN is essentially an electronic trading venue, like a stock exchange. Just like a stock exchange, an ECN allows participants to trade with Limit Orders and Market Orders. ECNs are managed by the company who owns them and they charge a commission to both parties for matching their orders. Because the venue is just matching orders and not trading inventory like a market maker or marking-up on the purchase price like a broker, the spreads are typically tighter. The success of an ECN is fully dependent on its scale. There must always be buyers and sellers at the same time. Without a decent number of users and depth of market, the ECN basically becomes useless and it doesn’t make money. An Electronic Communication Network can be useful to brokers, market makers, corporations, proprietary trading firms and high net worth individuals.
ECN is a common term thrown around by retail Forex brokers. When a broker states that it is an ECN broker what it means is they route all orders to an ECN on your behalf. Therefore they do not have an internal order book or conduct any principal trading. It further implies that they will offer tight spreads which they do not mark-up on and will only charge a commission. A broker operating under this model doesn’t gain if you loos, nor do they lose if you profit, they just want you to trade and keep trading, so they can charge a commission.