Joseph,
Thank you for your excellent post on fragmentation and the problem that might cause for ECNs.
When I was trading at ABWatley, and putting orders through ISLD, I experienced fragmentation that I had never seen before. To set this up, before Watley, when I was trading through a market maker, I almost always had my 500 or 100 share orders filled. Rarely did I get partials. And I was making 100 trades in a day (back in my scalping days).
Upon moving to Watley, I would get partial fills more than 50% of the time when I selected ISLD. (I had to stop selecting ISLD because of the excessive commissions that partial fills were generating). Typically, moreover, the partial would be tiny. On an order of 1,000 shares, I would pick up only 36 or some such number.
With decimalization (and given your explanation), I can definitely see how the partial fill situation could get considerably worse.
Your fragmentation issue is just one reason why, as Merrill has noted, ECN trading will tend to be limited to the most liquid stocks (which make up only 10% of NITE's volume). Furthermore, I suspect that institutions and others trying to buy or sell large blocks of stocks, while they may use ECNs to some degree, will continue to rely heavily on market makers (NITE is very actively pushing development of institutional accounts, the new London office is supposedly to be used to court European institutional clients).
Once more, that was a really incisive post on decimalization fragmentation. I hope you don't mind that I've forwarded it to my f.c., he'll really enjoy it.
Gary Korn |
