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Say the market makers are quoting 45 bid and 45 1/8 ask on a particular stock. This is very straightforward: you can buy at 45 1/8 or you can sell at 45. |
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However, on an ECN at that same instant you may be able to electronically match a trade at 45 1/16between the spread. The buyer pays only 45 1/16, the seller gets 45 1/16. Whether you are buying or selling, your price is 1/16 better! You win on either side of that transaction. Both sides of the transaction on an ECN have an incentive for price improvement. Is this a great world or what? |
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Advantages to using ECNs are |
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the participants in the ECN have an incentive to give one another mutual price improvement. |
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the participants in the ECN provide liquidity to one another. |
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the participants in the ECN post their actual "size" interest so you have a better indication of market liquidity and price support. |
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Sounds perfect, doesn't it? But nothing ever is. |
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Here's the problem with ECNs: no one is being "paid" to maintain liquidity, so there may not be a suitable bid or offer on your favorite ECN every time you want to trade. |
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That was a pretty big drawback three years ago, but today there are ten ECNs, so even if your favorite ECN is not posting the price you want right now, chances are another of the ECNs might be. |
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Here is the list of the ten ECNs which are active as of August 2000: |
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As you learn to trade, you will find the ECNs to be an important part of your business. Because ECNs lack liquidity, never submit a market order on one. Use limit orders with ECNs! |
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To learn more about trading with, and against, market makers and ECNs, you can access a wealth of information about their trading pat- |
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