Electronic Communications Networks
Marcus WooKevin Appel
Activity Stock X
Stock Y
Stock Z
Person 1 represents a brokerage and has control over 1,000 shares and have access to market information
Person 2, 3, and 4 are private investors who have 100 shares to invest and only know that all 3 stocks have been performing stably.
Assume that all stocks have the same share prices.
What is an Electronic Communications Network (ECN)? Alternative Trading System
Privately Owned
Subscription Service
Establishes anonymous and direct connection between buyers and sellers
Accounts for 65% of trading volume of NASDAQ-listed shares as of 2005
History of ECNsTechnological changes
Securities industry quick to adapt (SuperDOT)
Instinet recognized as first electronic exchange market – 1998
Skeptical about lack of human interaction
Name Founded Location/Owner
Island 1996 Subsequently purchased by Instinet
Instinet 1969 Numera Holdings, Inc.
Archipelago 1997 NYSE
Brut 1998 NASDAQ
Redibook 1998 Spear, Leeds, & Kellogg
Bloomberg 1997 Bloomberg, LP
Trading on ECNsEssentially a limit order book
Eliminates middleman
ECN listed as contra-side party
Smaller profit spreads (Buyer/Seller)
ECN acts as 3rd party guarantor
Benefits of Trading on an ECN Anonymity
Lower transaction costs/errors
Competitive pricing (transparency)
Extended hours of operation
Efficient transaction times
Ability to pursue market makers
Advantages of NYSEPreference ability and internalization
More suitable for large stock orders
Price improvement via the auction process
No subscription fee for retail investors
RegulationsECN serves a limited regulatory function
Assume default risk
NYSE Rule 390
Heavily criticized and repealed on May 8, 2000
Going public$1 billion class action lawsuit against market makers
Maintaining high stock prices on open market
Trading with each other at lower prices on Instinet
Result: ECNs open to the public
Electronic Communications Networks Today
Electronic Communications Networks TodayExpand markets in which they hold investments
Reduce volume of transactions flowing through specialist
Cuts costs
Involvement allows small-time investors access to ECNs
Questions?