If you look back at the late-'90s, when new ECNs were being introduced into the marketplace regularly and a huge rivalry had developed between the ECNs and the exchanges, the securities industry's last consideration would have been that the two would join forces. The big question seemed to be which one would survive - the auction market or the new electronic-trading model? A mix of the two wasn't considered an option.
ECNs and exchanges have completely opposing philosophies - one, a cutting-edge technology company, ready to completely change the way the markets function; and the other, a traditional institution that has done its best to preserve its 200-year-old auction-market business model.
Times have changed, however, and the markets have evolved. As Robert Iati, a TowerGroup analyst, notes in one of his research reports on innovation, the prime area for change and innovation is the front office. According to Iati, we will see a completely new method of trading in the coming years - one that doesn't simply revolve around floor-based trading versus electronic markets. It could be a blend of the two, as suggested in our cover story (page 14). It could be the creation of a new trading process that allows traders to trade across securities types and/or geographies. The bottom line is that existing silos within trading departments will eventually dissipate, and the changes that Reg NMS will institute may make that happen quite soon.
Walls are already being broken down between ECNs and exchanges, as evidenced by the recent alliance between BRUT and Nasdaq, and the acquisition of the Pacific Stock Exchange by Archipeligo. Both exchanges and ECNs are being forced to look at their business models and reinvent themselves.
Exchanges must move rapidly or Reg NMS may make them irrelevant. They know that the quickest way to attain fast-market status is by purchasing an ECN. But, with all the consolidation in the ECN market, there aren't a whole lot of options left. INET is the one to watch, and whichever exchange it partners with can breathe a sigh of relief.