The electronic communications network (ECN) market is going to consolidate, the New York Stock Exchange's (NYSE) Rule 390 should be abolished and the Intermarket Trading System (ITS) must be overhauled. Those were just some of the opinions expressed by panelists on last week's ECN roundtable--which was comprised of executives from the National Association of Securities Dealers (NASD), Tradescape, CyberCorp. and all nine Securities and Exchange Commission (SEC)-approved ECNs.
The panelists on the roundtable, which was held at the Jacob Javitz Convention Center in New York City, also concluded that there will continue to be a place for market makers and specialists in the U.S. equity markets and agreed that fragmentation is most prevalent in the after-hours ECN market. In addition, some panelists said that pressure being exerted by ECNs that have filed to become exchanges will force the NYSE to reinvent itself.
Phillip Berber, founder and chief executive officer of Austin, Texas-based CyberCorp, predicted that traditional stock markets will in the future function more and more like ECNs, which electronically match equity orders. ECNs and exchanges will be "very much interlinked," he said, and there will only be two or three ECNs operating in a community comprised of "global, virtual markets."
Brian Hyndman, president of SunGard Data Systems' Brass Utility (Brut) ECN, concurred that the market will shrink. "There will be three of four ECNs standing in the end," he said. Brut, of course, is already doing its part to make that perception a reality. Brut has been in merger talks with the Strike Technologies ECN for months (ETW, 9/13/99) and in late October the entities finally signed a letter of intent to join forces (ETW, 11/1/99).
One ECN that could very well survive the potential equity trade matching system purge
is Spear Leeds & Kellogg's Redibook. The ECN has signed interface agreements with major online discount brokers and has the backing of minority investors like PaineWebber, Lehman Brothers and CS First Boston.
However, while noting that Redibook does believe it is strongly to thrive in the future,
Redibook CEO Larry Lieborwitz said that he does not see consolidation as "inevitable." Similarly, Mark Yegge, chief executive officer of the NexTrade ECN, said that major ECN consolidation is not written in stone. "I really believe that we all have a different flavor to bring to the table here," he said.
That said, while it is conceivable that the growth of ECNs could lead to a shrinkage of Nasdaq market makers, no one on the panel predicted the death of equity intermediaries. In fact, Art Pacheco, president and CEO of Strike, said that when a stock is illiquid, the market often needs an intermediary to "move" that security. " I believe that market makers and specialists do serve a purpose, and we need them," he said.
One component of the NYSE structure that is not needed, the participants agreed, is the NYSE's Rule 390. Essentially, the rule prohibits NYSE members from trading issues listed on the exchange prior to April 26, 1979 outside the confines of a traditional stock market. That means, of course, that members can't currently route orders for 390 stocks to ECNs.
Not surprisingly, with the plethora of Wall Street broker/dealers that now have minority stakes in multiple ECNs, the cries for the elimination of 390 have grown loud--and SEC Chairman Arthur Levitt has himself recommended the termination of the rule.
But the panelists said that while abolishing 390 would be a good first step, more work needs to be done to create a fairer equity marketplace. Redibook's Lieborwitz said the fact that the NYSE declined an invitation to participate in the roundtable reflects the Big Board's negative attitude toward ECNs.
Moreover, Harvey Houtkin, president of All-Tech directs Attain ECN, said that there is still a "country club" attitude that permeates the NYSE. The SEC, he said, must be more aggressive when it comes to stamping out anti-competitive rules. "Levitt ... shouldn't recommend that 390 be eliminated. He should demand it," said Houtkin. "If the regulators don't do their jobs, we're going to be talking about this for years to come,"
One system that regulators may mandate an overhaul for is the ITS, a trading network which electronically links the nine U.S. equity markets. Unless ITS is revamped, ECNs will not see any benefits from the abolition of 390, said Joel Steinmetz, vice president of equities at Instinet.
The biggest beneficiaries of the competition that could evolve between the ECNs and the NYSE will be the American investors, concluded Island President Matt Andresen. "The big winners will be the investors. It will be hell on us, but it will be great for the end-users," said Andresen.