Electronic communication networks (ECNs) 101

Electronic communication networks (ECNs) 101

What is an ECN?

An electronic communication network (ECN) is a computerized trading system that automatically matches buy and sell orders at a specified price. By electronically bringing buyers and sellers together, ECNs provide an alternative to traditional stock exchanges, offering investors anonymity, lower transaction costs, greater flexibility, and longer trading hours. They also make it possible for traders to avoid the use of market makers, which are companies that are able to buy or sell a given stock on a regular and continuous basis, and profit off the difference between bid and ask prices. In other words, ECNs connect major brokerages and individual traders, so they can trade directly between themselves without having to go through a middleman. In Canada, you may incur alternative trading system (ATS) or Exchange fees. In the U.S., you may incur ECN or exchange fees.

How do I choose an ECN?

Canadian routes

All orders for Canadian stocks are filtered by smart routers. Smart routers accept orders, scan the market, and choose a destination to hold or fill your order. Orders are sent either to the TSX or TSX Venture, or to an ATS (alternative trading system), such as Alpha, Chi-X, Omega, or Pure. Canadian options orders are routed through MxV.

What are ATS, Exchange or ECN fee?

ATSs, Exchanges, and ECNs charge clients a fee to trade securities using their networks, but it is generally only applied when trades remove liquidity from the market. Fees can apply to both Canadian and U.S. opening (buys and shorts) and closing (sells and covers) transactions. In Canada, you may incur ATS fees or Exchange fees, while in the U.S. you may incur ECN or exchange fees.

How do I add or remove liquidity?

Adding liquidity refers to orders sent to an ECN at a price that is not immediately executable. The order sits on the ECN’s book until the market moves to that price, at which point the order executes.  Buying on the bid and selling at the offer are referred to as adding liquidity. Such trades do not incur any additional exchange, ECN, Exchange, or ATS fees.

Removing liquidity refers to orders sent to an ECN at a price that is immediately executable. A buy order is sent with a price equal to or higher than the current offer and a sell order is priced equal to or lower than the current bid. Buying at the offer or selling on the bid are referred to as removing liquidity. Nearly all routes charge an additional fee if a trade removes liquidity from the market.

In general, the following trades add or remove liquidity from the market:

Trades likely to add liquidity

  • All U.S. trades where MNGD, LAMP, or POST is selected as the preferred ECN (including market orders).
  • Limit orders that are not immediately executable. Examples of limit orders that are not immediately executable include the following:
  • Buy and cover orders where the limit price is less than the ask price.
  • Sell and short orders where the limit price is greater than the bid price.

Trades likely to remove liquidity

  • Market orders
  • Marketable limit orders
  • Buy and cover orders where the limit price is equal to or greater than the ask price
  • Sell and short orders where the limit price is equal to or less than the bid price
  • Executed stop orders
  • Executed stop-limit orders where the limit order is immediately executable;
  • Executed VTSOs (virtual trailing stop orders)
  • Any order with special restrictions, such as AON (all or none)
  • Any order executed in the pre- or after-market
  • Trades executed at market open or market close

How can I avoid ATS, Exchange, and ECN fees?

To avoid ATS or Exchange fees on Canadian trades, you can place an order that adds liquidity, i.e. a limit or stop order rather than a market order. A limit order placed either below the current bid price or above the ask price is unlikely to get filled immediately, so it will sit on the ATS’s or Exchange’s order book. This adds to the number of shares available and hence to the routes liquidity. ATS and Exchanges like to have liquidity because it makes for higher volumes and more robust trading, resulting in higher trading revenues. To avoid ECN fees on US markets, send your trades through a market maker, which will avoid ECN fees.