In Investing, Money

Investing Series: What are ECN (Electronic communication networks) Fees?

This is a part of the Investing Series.

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Sometimes you will hear things like:

“We don’t charge commissions on buying index ETFs but ECN fees may still apply”.

(Questrade does this by the way. They don’t charge you commissions on any index ETFs you buy from them, which makes them a better deal than most banks in Canada.)

WTF ARE ECN FEES?

Electronic communication networks (ECN) fees, are basically fees that they charge clients to use their networks when you’re buying shares in an ETF or stocks on the stock exchange.

Think of it like a Mastercard or a Visa fee.

Credit cards charge merchants to use their terminals in their stores, for when clients want to pay with a credit card, and this works kind of like that.

They’re based on something called “liquidity” in the market.

(cue groans of frustration)

It’s a complicated, unwieldy concept that basically just means that your order takes the place of someone else’s, and for that priority placement, they charge you the ECN fee.


When you “displace the liquidity” of the market, you get dinged for being a liquidity hog.

OINK OINK.

You don’t really need to think any more on the subject if you don’t want to, you just need to know how to AVOID these fees.

WHEN ARE ECN FEES CHARGED?

As with commissions, they are taken out immediately when you place a trade.

HOW ARE ECN FEES CHARGED?

As it was told to me by Questrade, ECN fees are only charged depending on how you trade.

If you buy stocks under $1, you get slammed with the fee.

If you buy stocks close to the market price (even if you set a limit price just below it), you get slammed with the fee. ($0.0035 per share)

If you buy stocks above $1 at market price, you get slammed with the fee. ($0.0008 – $0.00012 per share)

Basically, if you try and buy stocks at the price that they’re trading at, you will get slammed with the fee.

To avoid it, you need to set limit prices, or have orders that are gradually filled over the day, not filled immediately.

Any stock order that is filled immediately, probably has an ECN fee because you were a liquidity hog, and you took priority over the other orders.

Questrade has their fee chart here.

WHAT DOES THAT MEAN “LIMIT PRICE” OR “MARKET PRICE”?

Market price just means the EXACT price of how much it costs right now in real-time.

If a stock is trading at $10.72 this very second, its market price is $10.72.

Limit price means you can set a ‘limit’ on how much you want to pay, and sometimes this doesn’t jive with how much people want to sell their stocks for.

Photograph-Travel-Brussels-Belgium-Bazaar-Flea-Market-Shopping

 

A bazaar / flea market in Brussels, Belgium

Think of it like a big old bazaar.

People are yelling out prices of how much to charge for their wares, and others are yelling out how much they want to pay for those wares.

Let’s say Stall Owner #1 says he’ll sell his blue glass vases for $10.

Stall Owner #2 says she can do better at $9.99!

You, the consumer, want to buy it at $8.50 because you want a deal.

Everyone keeps yelling what they want to sell or buy these blue vases at.

Eventually, you might crack and either buy the blue glass vase at $9.99 instead of $8.50, or the stall owners might crack and say: Fine, take it for $8.50.

That’s how the stock market works as a concept.

A big fat ol’ bazaar of screaming people.

Now with the stock market as an example, let’s say the stock is trading at $10.72 and you want to buy it at $10.50 because you think it’ll plummet.

You set a limit price of $10.50 for the number of stocks you want to buy, and when someone out there wants to sell their stocks at $10.50, your order gets ‘filled’ or ‘executed’, at your chosen $10.50 limit price.

…and you don’t get charged with an ECN fee because your order wasn’t executed immediately. It was placed in line, in a queue and you were dealt with as the day progressed.

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Sherry of Save. Spend. Splurge.

Millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. Since then, I have paid my $600K home in cash (my half was $300K), my $180K casr in cash, worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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Posted on April 24, 2017

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5 Comments

  1. cj

    The OINK, OINK really made my day. I love pigs and it was funny with a capital F. And, that was a creative and well done explanation of ECNs.Even I may have comprehended;) Hope you have a dilly of a weekend, Mochimac!!!

    Reply
    1. saverspender @ save. spend. splurge.

      @cj: I sure hope you have comprehended!!! I tried to make it as easy as I could.. (read: the only way I understand it).

      Oinker, out!

      Reply
  2. Gen Y

    So that’s what these ECN fees are. So if you set a limit price below the market price, then the market plummets, and your limit price becomes the new market price and your order gets executed, do you still get slammed with these ECN fees?

    Reply
    1. saverspender @ save. spend. splurge.

      @Gen Y: No, because when you go to set the limit price, if it’s too close (or at) the actual (current) market price as of the time you set it, the fee is charged because your order gets moved up in priority and gets filled immediately because it’s so close to market price.

      If you set it below market price (by a margin, not sure exactly what it is), and then the market drops in an hour, and your limit price gets executed, no ECN fee (unless the stock was below $1 for instance, then there’s always a fee) because you didn’t displace anyone’s order in line.

      Think of it like butting in line.

      An ECN fee is being charged if you butt in line and say: I want 100 of this stock now, at the market price.

      Other buyers who don’t want to pay the price right now, get pushed back, and you get first dibs to get your order executed.

      Timing is everything.

      Reply
      1. Gen Y

        @saverspender @ save. spend. sIplurge.: Okay, I get it now! Thanks!

        Reply

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