Electronic Communications Networks (ECNs)

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Electronic Communication Networks are electronic systems used by proprietary trading firms that display and matches securities buy and sell orders placed on exchanges and over-the-counter by market makers and traders. The highest bid and lowest offer is published on the NASDAQ (National Association of Securities Dealers Automated Quotation) workstation and distributed through information vendors around the world.

Passive: Adding Liquidity – Buying at Bid, or Selling at Ask

Passive buying
Passive buying means that you are trying to buy a stock at a price that is lower than the current
best ask price. Therefore your order cannot be executed immediately (since you are not
agreeing to the seller’s price) and gets displayed on the bid side of the level 2.Passive buying
means to place a bid and to wait for a seller to sell you his stocks.

Passive selling
When selling passively you are trying to sell a stock at a higher price than the current bid price.
Your order won’t be executed immediately and gets displayed on level 2.
Passive selling means to place an offer (ask) and to wait for a buyer to buy shares from you.
There is no way to ensure that your order gets executed when trading passively, since there
might be no one willing to agree to your price.

When to Go Passive
Going passive can be used when you anticipate a reversal so you wouldn’t mind catching it at a
level before the break point. Also if a stock is trading in a tight range with a lot of levels on both
sides you should attempt to make the trade passively. Some suggested routes include, BATS
and ARCA which provide rebates for adding liquidity.

Aggressive/Active: Removing Liquidity – Buying at Ask, or Selling at Bid

Aggressive/Active buying
Active buying means to buy shares from an existing seller who has an offer in the market. You
are agreeing to someone else’s price offer.

Aggressive/Active selling
Active selling means to sell shares to an existing buyer who has a bid in the market.

When trading actively you are most likely to get your order filled immediately, unless someone else steps in front of you. Remember that you can only get filled for as many shares as the counter-part is willing to trade. Therefore you might get partial fills.

When to go Aggressive/Active:

If a stock is trending and moving with a lot of momentum and you wish to enter the position, you should enter actively. Some preferred routes to use are BUZZ which provides an inverse  rebate. You can also use AROUC or AROUZ which go after EDGA and then Dark Pools. They are  useful when trading very liquid stocks such as BAC, F, S, NOK

(These rates are not real rates they are being used as examples)
ARCA – light pool, rebate route

  •   Adding Liquidity =-$2.10/1000 Shares – Remove Liquidity  $3.00/1000 Shares

ARCA ALO –light pool, rebate route, and add liquidity only passive

  • Add Liquidity $2.00/1000

BATS –Similar to ARCA

  •   Add Liquidity $2.50/1000 Remove Liquidity $2.98/1000

INET – Like ARCA and BATS

  • Add Liquidity – $2.00/1000

Inverse Rebates

BAYX (BATY ONLY) – inverse rebate, gets filled before ARCA

  • Add Liquidity $0.20/1000 Remove Liquidity – $0.30 / 1000

BOST – Biggest inverse rebate, for removing liquidity
AROUC – Goes after EDTGA, EDGY, and Dark Pools, Capped at $3.00, If adding liquidity it routes to EDGX
AROUZ – Goes after EDGA and Dark pools, Capped at $1.00

  • Adding Liquidity- $0.30/1000

Dark Pools / Managed Routes

Dark pools are Alternative Trading Systems that are not publishing their order book publicly. Dark pools
are generally used by institutions to try reducing market impact when placing large orders. Dark liquidity
pools offer institutional investors many of the efficiencies associated with trading on the exchanges’
public limit order books but without showing their hands to others. Dark liquidity pools avoid this risk
because neither the price nor the identity of the trading company is displayed.

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