Electronic Communications Networks (ECNS) - How Ecns Work, The Development Of The Ecn Industry, Duking It Out With The Exchanges

Electronic communications networks (ECNs), the headache of major stock exchanges in the late 1990s and early 2000s, are computerized trading systems through which buyers and sellers of stocks and other securities have their orders matched via instant digital transactions. Although electronic trading through ECNs takes a variety of forms, one thing they all have in common is that they undercut the major brokerage houses and New York Stock Exchange (NYSE) specialists, such as Merrill Lynch and Goldman Sachs. By eliminating these middlemen in securities trading, ECNs offer significantly lower transaction costs. Because of their speed and low costs, ECNs were widely used by online brokerages, some institutional investors, and day traders.

ECNs are most conspicuous on the NASDAQ exchange, where they got their start. The NYSE, with its layers of complex rules and regulations regarding the trading of large-capitalization securities, has been much more resistant to encroachment by ECNs. By early 2001, ECNs accounted for a hefty 35 percent of all NASDAQ trading volume, and research firm Cerulli Associates predicted that share would reach 50 percent in 2001. Celent Communications, however, didn't expect ECNs to capture that much of NASDAQ until 2003.