In a move that could cause the transaction of NYSE-listed stocks to migrate from the Big Board's floor specialist to electronic communication networks (ECNs), the Nasdaq this week began allowing ECNs to participate in its electronic market, now called Nasdaq InterMarket, giving them unprecedented access to previously unattainable stocks.
The new relationship between Nasdaq and the ECNs gives ECN customers access to an entire pool of listed stocks that they could never trade before. InterMarket functions as the electronic portal.
The SEC earlier this year gave ECNs the ability to make a market in exchange-listed stocks, and recently the NYSE rescinded one of its rules-rule 390-that kept stocks listed prior to 1979 from being traded anywhere but on its floor by NYSE members.
ECNs Bloomberg Tradebook, BRUT, and MarketXT will all join InterMarket, where they will have the opportunity to match their customers' orders internally and with other InterMarket participants. Richard Schenkman, BRUT chairman and CEO, says the move is "about client demand for access and to limit client fragmentation ... to give people a consolidated look at information and prices."
Mark Madoff, director of listed securities trading with Bernard L. Madoff Investment Securities, says, "InterMarket enables us to compete for order flow in a single platform. There will be faster execution, lower cost and price improvements, because we all have to compete with each other to get business." Madoff notes that a trade performed on the floor of the NYSE could take as long as 30 seconds, but on an electronic network, trade time falls to one or two seconds.
Nasdaq President Richard Ketchum says the system will benefit from "openness, transparency, price and speed, by combining the strengths of ECNs and market makers." He goes on to say "there will be more competition than ever before. The orders are routed to the best price wherever it is." Bloomberg Tradebook's Kevin Foley adds, "Orders will be visible on every quote system in the planet."
Dean Furbush, managing director of Nasdaq's Third Market, says the key element of the system is "open architecture. Nasdaq InterMarket is inclusive and geared to participants competing with each other on trade price, cost, speed and variable levels of anonymity." Furbush says that ECNs currently handle about 25% to 30% of Nasdaq's exchange volume but only 5% of trade on exchange-listed stocks. He says that with new access through InterMarket, those numbers could change.
Nasdaq InterMarket links with market participants through interfaces, including proprietary systems (via an API), Nasdaq technology (such as Nasdaq Workstation II NWII) and the Intermarket Trading System (ITS).
According to Nasdaq, it is currently conducting discussions with other potential participants, including Instinet Corporation and REDIBook ECN. Furbush adds, "We are speaking with virtually all of the ECNs."