ECN fees are charged when the electronic communications network (also known as alternative trading system) is used to securely trade the financial markets.
ECNs help match buy and sell orders and are critical for keeping the market liquid by determining the bid-ask spread.
The term ECN Fee is used as an umbrella term to group together all of the fees that an electronic communications network charges for its usage.
Whenever a buyer or seller places an order that the ECN deems as “removing liquidity” from the market, they get charged a fee.
Liquidity is an asset’s ability to be bought or sold easily close to its current value.
Open orders are useful in keeping markets liquid, as they are letting traders know that others are either looking to buy or sell securities.
Execution of an order however leads to shares being removed from the market, thus making that specific stock less liquid.
Market buys (buying shares at the current market price at the time the order is placed) are considered removing liquidity, as the trade is likely to instantly be executed.
The fees charged on these types of trades come from the ECNs that provide the service which matches buyers and sellers.
How do ECN fees work?
Think of orders being placed as individuals trying to pass through a door into another room.
Trades cannot be executed until they are allowed to pass through the door into the other room.
All of the buyers and sellers of a company’s shares are in the room looking to execute orders, but in order to get into the room they each have to pass through the door.
The door in this case is the electronic communications network and it collects a fee for allowing traders to enter the room.
Brokerage companies that route orders to an ECN are charged a fee to be able to place the shares in the system which adds to liquidity by expanding tradeable share quantity in the ECN ecosystem.
ECN fees are usually calculated by shares traded on the system – fractions of cents per share traded.
This may not seem like a lot, but if high volumes of trades are executed, this can quickly add up to a substantial amount.
ECN fees are usually always charged when removing stocks from circulation (removing liquidity from the system).
For the most part, brokerages will absorb the ECN fees under normal trading circumstances through their flat trading fees.
How to avoid ECN fees?
Since ECN fees are charged when liquidity is removed from the market, there are certain conditions that can be met to avoid being charged.
Orders that are considered as removing liquidity are ones that are likely to be executed immediately.
Market orders are a good example of an execution that removes liquidity and will be charged an ECN fee.
Non-marketable limit orders that, when buying, have the limit price lower than the ask or, when selling, have the order higher than the bid, will be open and spend more time in the order queue.
It will stay there until somebody agrees to buy or sell at the limit price, which adds liquidity to the market and could omit the ECN fees.
ECN fees may also be avoided at times when purchasing shares in even lots.
An even lot is any lot that is in increments of 100 (for example, 100, 200, 300, 1000, etc.).
If a trade or open order meets these criteria, it still may be charged an ECN fee if the order is executed at the time the market opens (9:30 AM EST) since it will be removing liquidity from the market when it’s just opening up.
Review the terms and conditions of your brokerage to be clear on when ECN fees are charged and when they can be avoided.
Frequently Asked Questions
- Why are ECN fees so high?
ECN fees are unique to each brokerage firm. Each firm has its own deal negotiated with select electronic communications networks. The best way to find the lowest ECN fees is to compare the different brokerages. An ECN fee of $0.0008 to $0.0035 is not unreasonable. All brokerages either charge the user the ECN fee or decide to absorb the cost to attract more users, but the fee is always present with liquidity reducing transactions.
- Does Wealthsimple Trade charge ECN fees?
Wealthsimple Trade does not charge ECN fees. The platform has chosen to absorb those costs to attract and retain users.