During a conference session at the Financial Technology Expo in New York last week, NexTrade CEO Mark Yegge addressed the issue of after-hours market fragmentation and proposed a new solution in the struggle toward opening the order books of electronic communications networks (ECNs). Yegge, who was joined by representatives from Island and Archipelago on the ECN interfaces panel, 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, 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.
Yegge's proposal calls for a centralized order routing mechanism utilizing the FIX protocol with quotes being displayed free of charge. "It's a portal to bring all of us together and make sure that if somebody has a better price on one system, there is no disadvantage to only being a member of one, there is a linkage protection," said Yegge. "We believe that our quotes are owned by the investors, so we believe that those quotes should be given back to the investors and not be charged."
In response to SEC chairman Arthur Levitt's challenge to combat market fragmentation and lack of liquidity after hours, Yegge said he has put forth the CTP proposal. The portal will provide for an anonymous, central point of liquidity and a unified routing mechanism through FIX, making way for potential global expansion of the after-hours market, Yegge explained.
During the panel session, 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 was to open up the order books of the market participants, but in a different way. Townsend called for a "multi-lateral network," to be presented free of charge during and after market hours. 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," noted Townsend. "You can have multiple price discovery points, multiple book publication points that can be tied together through the multi-lateral network."
The concept of multiple points of price dissemination is important, said Townsend, in order to avoid having a single point of failure, such as what happened when Nasdaq's SelectNet system went down last week. He also explained that as Nasdaq continues to expand its hours of operation and therefore its legal monopoly over a consolidated quote feed the central limit order book concept would be forced out of the marketplace. For this reason Townsend said he advocates the multi-lateral network where ECNs can choose to link and intermingle books to provide liquidity.
While this proposal sounds similar to an agreement already circulating among the nine SEC approved ECNs to develop an interface for after-hours price posting, Townsend and Yegge agreed that linkage was stalled when Nasdaq extended its hours. But Townsend said that Archipelago is continuing talks with other ECNs to develop similar links during and after market hours. He would not name the other ECNs involved, but Townsend said that Archipelago already has a private link to Island's order book, which is also posted on the Internet. While Island can accept orders from Archipelago it does not route out.
"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," explained Yegge.
The NexTrade CTP proposal requests a no-action letter from the SEC to operate as a consolidated quote system and exemption from exchange designation.