As the after-hours market heats up, electronic communications networks (ECNs) are struggling to lay the groundwork for a more liquid, efficient marketplace for investors. During a conference session at the Financial Technology Expo in New York, NexTrade CEO Mark Yegge addressed the market-fragmentation issue head on. Yegge, who spoke on an ECN interfaces panel with representatives from Island and Archipelago, called for a central after-hours limit order book where all market participants can post their bids and offers in a non-profit environment.
The central limit order book, to be called Central Trade Portal, Inc., will be open to ECNs, ATSs, exchanges, associations and broker/dealers during the after-hours market, which now officially begins at 6:30 p.m. when Nasdaq closes. Located on the Web at centraltradeportal.org, the site will initially only accept limit orders and will route back to the source if orders are not executed after market hours.
Stuart Townsend, chief technology officer of Archipelago and president of Townsend Analytics, agreed that the best way to address the issue of fragmentation in the after-hours market is to open up the order books of the market participants but in a different way. Townsend called for a "multilateral network," to be presented free of charge on the Internet. In contrast to Yegge's idea of a central limit order book, Townsend expressed the need for multiple books to be made available and interact for after-hours price dissemination.
"We have a proposal on how to publish ECN books over the Web with the FIX protocol and other exchanges are looking at that proposal," notes Townsend. "You can have multiple price-discovery points, multiple book-publication points that can be tied together through the multilateral network."
The concept of multiple points of price dissemination is important for the after-hours market, says Townsend, in order to avoid having a single point of failure, which is what happened when Nasdaq's SelectNet system went down in mid-November. "The idea is for all the ECNs to share their books and accept orders from other ECNs, whether they choose to route their orders to other ECNs is up to them," he says.
While this proposal sounds similar to an agreement already circulating among the nine SEC-accepted ECNs to develop an interface for posting after-hours prices, Townsend and Yegge say that the linkage has been stalled. "At this point, the after-hours solutions set forth are voluntary, not all the players are coagulated into one area and even if they are, they're not providing all the quotations that we believe are necessary for a level playing field," explains Yegge. With Nasdaq and other exchanges staying open later and later, only time will tell how and where the ECNs will legally fit into the after-hours market, but the scramble to come together and provide a liquid trading environment is evidence that they'll find a niche regardless.