Technological innovation and a budding trend toward linking the once standalone electronic communication networks (ECNs) to increase liquidity is changing the face of electronic trading. In fact, say some observers, Nasdaq marketmakers, who have seen their core business threatened by the ECNs, are looking to the NASD to offset through rule-making what they are unable to contain through open competitive pricing.
"The increased reliability, speed, and access of the ECNs have surpassed the capacity of Nasdaq," explains Jim Lee, president of the Electronic Traders Association and head of Momentum Investors, a day-trading firm. "They are losing market share on companies on their own markets." For instance, Lee notes, while the percentage of volume his firm executed on Instinet rose to 60% over the last two years, the percentage of trades sent over small order execution system (SOES) dropped to 10% from 75%. "The enhanced data circuits, and satellite linkups and over-all communications capability are raising cost-effectiveness of the private electronic systems."
The most recent movement in the ECN arena is the trend toward open access. For example All-Tech Investment Group's Attain and Datek Online's have put aside their competitive differences in favor of connectivity and liquidity. Currently Attain links to Island and Archipelago, and in the near future hopes to provide connections to Brut, Strike Technologies and RediBook. Strike has also agreed to open up the gates to RediBook, and potentially other ECNs.
In addition to open access, professional and non-professionals will chose an ECN for various reasons-perhaps because it uses the most innovative technology, or it is faster than its competitors. Or maybe it provides analytics or direct access to the Internet. Equally important is ownership-if the ECN is owned by a major Wall Street broker/dealer, that network will have greater liquidity than its competitors-a major goal.
Below is an outline of the nine ECN providers including Instinet, Island, Archipelago, Bloomberg's Tradebook, Brut, Redibook, Strike and NexTrade.
Island provides a back-end that operates with a wide range of commercial and proprietary interfaces, and reports testing its order matching systems to well over double current peaks of 70 orders per second. "We've never experienced a capacity issue on our system, even for a second," says William Sterling, Island's chief technology officer. Real-time use, says Mike Bundy, president of CSI Software, who has created interfaces for SOES, SelectNet and three major ECNs, averages between a mere 30-60 orders per second.
Modeling itself as the ultimate limit-order book, Island does not "shop" an order. "They match it or display it to the world," says Bundy. Island allows preferencing orders to SOES, SelectNet, and other ECNs.
Features, such as compliance with FIX-protocol, are unavailable on Island. Island pioneered a widely copied rebate system where any order placed on the Island book receives a rebate of $1 per thousand shares. Orders pulling liquidity from the system are charged $2.50 per 1,000.
Bloomberg's TradeBook hub is unique in that it provides Bloomberg analytics and information feeds and imports Bloomberg's buy-side friendly features. "Tradebook led the way on buy-side two-way connectivity," says Bruce Garland, Bloomberg. It introduced technical functions that allow participants to conceal true position size or the price at which they are willing to trade. The "Reserve" feature displays up to 2,000 shares at a time while "Discretion" programs TradeBook to execute at a specified spread away from the user's displayed limit. Users can trade with one another or "sweep the market" with an order that goes out to other ECNs, most often over SelectNet. "We see ourselves as consolidators of liquidity," adds Garland. Yet Tradebook's success, says Mike Bundy, has as much to do with the Bloomberg brand as technical wizardry. "Traders hit Bloomberg out of name recognition. But it's a solid system."