ECN: What is it? How does it work? How to use the trader?

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ECN (Electronic communication network) is an electronic system for making transactions for the purchase and sale of exchange goods. It is written in Wikipedia)))). Well, I will not reprint, who needs it, he will read about the creation history and so on. We are here on the case.

In a simple way, ECN is such a lokalka for all electronic exchanges available in the USA and all offers to buy / sell are combined into one center and are formed into a single table – LEVEL II (a glass of promotion). If you look at the most liquid securities of the USA in the LEVEL II table, you’ll get your eyes; for one price, this offer is offered to be bought / sold at once by a half dozen of these organizations. And these are only visible requests, there are Darkpool, in which today there is no less liquidity than in the visible part of LEVEL II (glass). However, about the “dark pools” at another time))).

ECN

ECN

So, ECN, where are they from, so why not make one, one? Competition! A country of freedom and opportunity. It seems that everyone is offering the same thing – a share, and even at the same price, but you look at the prints tape (Time & Sales), and there the deals go everywhere and don’t forget anyone, everyone gets it. How so? To better understand what ECN is, let’s return to the Russian market, see how it works. There are RTS, there is MICEX, on both exchanges almost the same set of instruments (stocks) is quoted, but they are not connected in any way, even the commission system is different. Those. we cannot buy Gazprom on the RTS, and sell it on the MICEX, there is no single regulator and order processing center, unlike the United States. Here, all have one product, but it is bought and sold as a result at different prices. Also, unlike the Russian market in the US, there is an opportunity to receive remuneration for making a deal, i.e. The exchange itself will pay you, if only you bought / sold from them, this payment is called “rebate” (English rebate).

The execution system provides for two options for making a transaction: “adding liquidity” and “liquidity removal”. The first is when a trader puts his order into a glass (LEVEL II) at the price of Bid or lower, Ask or higher. Those. The transaction will be completed only when its order is executed by someone with the help of a market order. The second is the immediate receipt by the trader of a position on the market. So most of the ECN works on the principle: received on the market – pay us, put a request – we will pay you. Those. they pay more for adding liquidity to the stock and charge for its removal. However, this is a business and the main thing here is to attract traders to your side. How to do this? First you need to deal with statistics. Most of the private speculators and algorithmic traders prefer to buy at market prices, then they need to be offered the opportunity to buy as usual “on the market”, but pay a reward in the form of a rebate. Great, and then who will pay for adding liquidity, because this market center must receive income? And the one who does not wish to stand in the queue for the execution of his application and lose the spread will pay, those who prefer to receive at the best price and as soon as possible. The exchange center also earns on this difference. Those. adding liquidity in this case will cost more than its removal. In other cases, the opposite. who prefer to get at the best price and as soon as possible. The exchange center also earns on this difference. Those. adding liquidity in this case will cost more than its removal. In other cases, the opposite. who prefer to get at the best price and as soon as possible. The exchange center also earns on this difference. Those. adding liquidity in this case will cost more than its removal. In other cases, the opposite.

If, for example, there is not enough liquidity in the right market center to execute the current market order, a routing system is provided that allows you to send the rest of the order to another market center, at the same price, but additional charges will be charged for this . Some market centers do not provide for the possibility of rauting, in this case, if the order has taken all available liquidity from this center, it will “override” the market, i.e. Bid will be equal to Ask, and the current order balance will be executed as a limit order according to the rules for adding liquidity, i.e. with the payment of rebates.

In large brokers has its own system of routing orders, are algorithms that help to find any available liquidity at the current price order, even looking at darkpuly. This is somewhat more expensive than the services of the ECN centers themselves, however this is more than offset by the best execution price and the reduction of the entire volume of the order, without switching to other price levels.

Now we analyze the centers themselves in more detail, we restrict ourselves to the most famous and accessible. I also propose to study the ECN table compiled by the broker United Traders , while reading the article I recommend keeping it in front of you.

Let’s start with those who pay to add liquidity and charge for its removal. It is advantageous to use these ECNs when opening and closing deals with a limit order, adding liquidity to LEVEL II:

NYSE ARCA is one of the most liquid ECN, pays for adding $ 0.0021 per share and charges a removal fee of $ 0.003 per share, has the ability to redirect (get out) the rest of the order to other ECNs.

NASDAQ – there is probably no single action where there are no bids in this ECN, but it does not redirect the remainder of the order, there is no rafting, which is often the cause of the “closed market” in LEVEL II, when BID = ASK, the charge for adding liquidity is 0 , 0020 dollars per share, removal fee – 0.0030 dollars per share.

BATS is a very liquid ECN, with the possibility of rauting, available to all traders, paying the largest rebate for adding liquidity – $ 0.0025 per share; the fee for removing liquidity is $ 0.0029 per share.

EDGX – ECN with the possibility of rauting, rebate for adding liquidity – $ 0.0023 per share, payment for removing liquidity is $ 0.0030 per share.

EDGA  – ECN, which deserves special attention, has the possibility of rauting, pays the trader at $ 0.0003 per share when adding liquidity, charging a fee for removing liquidity of $ 0.0007 per share, slightly below its features.

Next, we consider the centers paying a rebate for liquidity removal, arranging them in the order of available liquidity:

BATS BYX – pays a rebate of $ 0.0002 per share, when a market order hits a BYX book, adding liquidity to this ECN will cost the trader $ 0.0003 per share.

NASDAQ BX – pays a larger rebate, compared with BYX – $ 0.0005 per share, but it’s not easy to wait until this ECN appears in LEVEL II and has time to react to it. When adding liquidity to this market center, the trader’s fee will be $ 0.0018 per share.

CBOE CBSX is the most generous to pay ECN rebates, as much as $ 0.0017 for each share, but at the same time the rarest in LEVEL II, often found in paper notes such as $ BAC $ SIRI $ AMD $ NOK $ S $ KEY  etc. For adding the center takes a fee of $ 0.0018 per share.

I am sure that every second person who has read this article has already figured out how to make money on only one difference in rebates and fees!))))) That’s right, there are several scalping strategies that allow you to perform zero transactions, i.e. do not take a single cent, but at the same time make a profit. Of course, we are talking about large volumes of orders, from 10,000 shares. But this I will show in the video, with specific examples, live. On the scalping course,  we attach great importance to this issue.

It also becomes clear that by adding liquidity in the ECN of the second list, which charge you for this, you lose a little on commissions, but you win in the time of execution of your order and at the time of receiving the position you will already be at least at zero in the trade, i.e. this will give not only time but also additional cents of profit. The logic here is simple: there will always be those who will not wait for execution on request, and will strive to get at the market price, but in those centers where they will also be paid extra for it, this is trading, you always have to think two steps ahead))) ))).

Of course, in order to have time to use all this, you need to customize your keyboard to suit your goals. Competently configured hot keys (Hot Key) will allow you to very quickly respond to the slightest changes in LEVEL II with greater benefit for you.

ECN EDGA deserves a separate light  , it is very reasonable to use it in hot keys (Hot Key) that are set to “hit the market”, i.e. for the buttons you use when taking a position immediately. The advantage here is the following: this ECN is quite common in LEVEL II, if you get your order in it, you pay very little, only $ 0.0007 per share, and if there is not, you will get your position in full, t .to. this center has its own routing and pay for it as much as you would give using, for example, NYSE ARCA . In other words, sometimes you will be lucky and you will save on getting a position, I don’t think you need to miss this opportunity))))).