Electronic trading system with services similar to those offered by an exchange
ECNs are alternative private trading systems in the US. They are permitted to access the Nasdaq system provided they fulfill the following requirements, which were laid down by the US Securities and Exchange Commission (SEC) in January 1997:
- Price information must be disseminated on an ongoing basis.
- The ECN must provide for limit book management or ongoing auctions.
- Customer orders must be (automatically) matched and executed.
Moreover, the operators of the ECN must guarantee that they will forward the best available market maker orders to the Nasdaq system.
Customers can view the ECN order book via a terminal or the internet. If a participant places an order through an ECN, the ECN attempts to execute the order in its own order book; if this is not possible, the order can be forwarded to Nasdaq or to another ECN. Orders are released from the system for only a brief period of time (e.g. 90 seconds) so that the ECN's own order book will remain sufficiently liquid. The obligation to ensure the best execution of customer orders is intended to prohibit an ECN from matching orders internally when the trade could be executed at a more favorable price in other markets. Thus, ECNs must link their order book with other markets to guarantee best execution.
