ECN electronic automatic matching transaction mode, full name of electronic communication network. It is actually an electronic trading network, which belongs to the advanced stage of electronicization in the development of financial market, and foreign exchange ECN is a foreign exchange trading technology with centralized-decentralized market structure. This model is completed through close cooperation with banks, institutions, foreign exchange markets and technology suppliers. Traders' orders are directly and anonymously hung on this network, and each order is in the same location, and the transaction is carried out according to the optimization of price and time.
Past life of ECN
1. The earliest ECN
The earliest ECN platform in the world should be said to be based on 1967 Instinet, which successfully operated the first real ECN in the world at 1969 and was widely used by Nasdaq market makers. It is worth noting that the company developed the world's first DMA (Direct Market Access) system as early as 1980. The early ECN was also famous for SelectNet, Island and NYSE Arca, which was produced by the merger of NYSE (new york Stock Exchange) and Archipelago. These ECNs are mainly used by market makers in large exchanges, among which NYSE Arca has been committed to promoting electronic stock trading in major American exchanges such as NYSE and NASDAQ since 1996.
2. ECN in the foreign exchange market
The application of ECN platform in foreign exchange market is later than that of stock securities. In the field of foreign exchange, because the foreign exchange market is divided into two levels: the inter-bank market and the retail market, ECN is generally divided into a larger ECN platform and a smaller ECN platform. The larger ECN platforms are EBS and Thomson Reuters, while the smaller ECN platforms are Currenex, Hotspot, FXall and Lmax.
Characteristics of ECN
In the securities trading market in the United States, investors can choose two main ways of securities trading: one is to provide a mechanism for buyers and sellers to get together for trading through trading agents. In fact, the trading agent mainly provides a trading channel, and the trading agent does not engage in buying and selling orders for the purpose of charging fees. ECNs is actually this kind of trading mode, which actually provides a trading channel for investors, with the purpose of charging users who access its trading system. The other is the dealer market, where dealers buy and sell clients' entrustment to obtain trading profits. The profit of this transaction comes from the bid-ask spread of the order. The higher the spread, the higher its profit, and the smaller the spread, the smaller its profit. The market maker market is actually such a typical dealer model.
The domestic A-share market is essentially ECN mode, that is, the transaction quotation comes from the buyer and the seller, and the orders of both parties are matched according to the principle of price priority and time priority. Around the world, most stock and futures exchanges adopt this model. Because in such a market, both parties to the transaction include a large number of retail investors and institutions, with sufficient liquidity, standardized transaction objects, appropriate transaction prices and appropriate transaction costs, large-scale electronic transactions can be adopted.
What about foreign exchange transactions?
The main bodies of foreign exchange transactions are banks, investment banks, funds, multinational companies and other institutions, while retail market transactions account for a relatively small proportion of foreign exchange transactions.
In recent years, due to the substantial increase in the cost of electronic technology, more and more retail investors participate in foreign exchange transactions, so the threshold of ECN mode of foreign exchange transactions is also decreasing, and more and more platforms adopt technologies such as STP and ECN.
The biggest advantage of ECN model is fairness.
Because the financial trading market is a market where both parties trade, you buy and I sell, fair trade and equal exchange. In the MM platform, because part of the liquidity is provided by the platform, and the platform itself is our trading intermediary, which is equivalent to being both a referee and an athlete, it has greater motivation to create a situation that is unfavorable to retail investors and create more profits for itself. For example, if you slip 1 point, you earn 1 point. The real ECN model, because the platform is only responsible for delivering customers' orders and earning fees, customers' orders are traded with other counterparties in a unified trading pool, which has nothing to do with the platform, thus reducing the unfairness of traders and embodying fairness and rationality.
ECN mode also has the characteristics of high transparency, fairness, high efficiency and anonymity.
The focus of ECN
There are two main focuses of ECN: one is electronic technology, and the other is liquidity.
Technology:
Modern foreign exchange ECN platform provides electronic trading network channels, and first-class banks supply endless quotations. The matching engine checks the limit and matches the order, and the speed is generally within 100 milliseconds. In the ECN platform, matching is driven by the quotation and the price matched with all orders, and the price difference is floating. However, due to the competition of many banks, the spread between direct dollar and cross euro is between 1-2. The order book is no longer a routing system sent to a single market maker, but a book that reveals the real-time optimal quotation of foreign exchange currencies. Through ECN, currency traders will benefit from more transparent prices, faster execution speed and more abundant liquidity, and banks will also reduce transaction costs due to less manual operation.
With the development of aggregation technology, the cost of finding counterparties is reduced, and the instruction book reveals less information, which promotes the development of smaller ECN platform.
Liquidity:
Liquidity is very important for ECN, how to attract it. First of all, it depends on the quality of transactions executed by the trading center. First of all, ECNs can gain a certain market share mainly because it can actively make use of the progress of information technology to improve the transaction quality, achieve a better entrusted execution price for brokerage customers than in the traditional market, and save transaction costs for investors.
Critical Scale of Liquidity and Broker's Solicitation
In the early stage of market development, under the condition that the number of participating investors is very limited, the low-level circulation of liquidity may exist for a long time. Only after the liquidity level reaches a certain critical scale, the self-strengthening mechanism of the market (the stronger the liquidity, the more investors will participate in the market, and the more investors will increase the liquidity of the market, thus further attracting investors to participate) will take effect and form a virtuous circle of the market.
In order to break through the low-level circulation of laying hens and realize the critical scale of liquidity, most ECNs first take the initiative to attract large brokers and institutional investors to become their major shareholders when they are established, making ECN a subsidiary of these large brokers and institutional investors, thus facilitating the internalization of customer orders; This is a typical practice of ECNs manufacturers. For example, Goldman Sachs also invested in ECNs manufacturers such as BRUT and Archipelago, and Merrill Lynch also invested in ECNs manufacturers such as BRUT, Archipelago and Island.
Condition analysis of ECN foreign exchange platform
Advantages:
1) low point difference
2) Fair trade, the best embodiment is that both positive and negative slip points will appear with equal probability.
3) Pending orders within the price difference
4) The transaction speed is extremely fast. Because of the different transaction transmission mechanisms, ECN platforms all use self-developed software, such as Advanced Trader of Swissquote, TWS of Yingtong, and the web version of LMAX. However, the advantage of this is that the data can be transmitted directly, so that the transaction data can be transmitted to the transaction pool very quickly to complete the transaction. However, some ECNs use MT4 platform, which will actually be limited by the performance of MT4 software and lose the advantages of price difference and transaction speed. But these developed independent trading platforms are really not easy to use.
Disadvantages:
1) The cost of holding positions is high.
Leveraged trading, ECN platform's financing funds for customers' positions are directly calculated according to LIBOR+ ratio. For example, if you short the Australian dollar, directly take LIBOR as the benchmark, the annual interest rate of 3% is 10W, the daily interest rate is 3%/365 * 100000, and each hand is about 7 dollars (actually about 10 dollars), which can make the cost of holding positions 20-30 dollars a day.
2) Using self-developed software, the software is difficult to use.
3) Occasionally, the liquidity is insufficient.
Because the ECN model is a real trading market, it will be affected by the lack of liquidity, leading to direct jump orders. For example, when major data is released, the price obviously exceeds your price, but there is no trigger list. Because of the lack of liquidity, someone hangs the price higher than you and hangs it earlier than you. According to price priority and time priority, your order cannot be executed.
4) Deposit expenses need to be borne by funds, and it is best to have an overseas account for deposit and withdrawal.