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How Do Electronic Communications Networks Relate to Stock Trading?

Electronic communications network (ECN) is a developing system of electronic stock trading. The SEC reports that about 30 percent of the total share volume in NASDAQ-listed securities and 40 percent of the dollar volume is traded using ECNs. Likewise, about 96 percent of the trades on ECNs are shares of NASDAQ-listed stocks.

ECNs enable buyers and sellers to meet electronically to execute trades. The trades are entered into the ECN systems by market makers at one of the exchanges or by an OTC market maker. Transactions are completed without a broker-dealer, saving users the cost of commissions normally charged for more traditional forms of trading.

Subscribers to ECNs include retail investors, institutional investors, market makers, and broker-dealers. ECNs are accessed through a custom terminal or by direct Internet dial-up. Orders are posted by the ECN for subscribers to view. The ECN then matches orders for execution. In most cases, buyers and sellers maintain their anonymity and do not list identifiable information in their buy or sell orders.

More than a dozen ECNs operate in the U.S. securities markets, including Archipelago Exchange, Brut, Instinet, Island, and SelectNet.

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