ECN Concerns
Barrons Aug 14th,1999
To the Editor:
I have been day-trading for over four years. I am concerned about the regulation and proliferation of electronic communications networks, or ECNs, and particularly the potential for electronic frontrunning. Let me give two examples of how this might happen.
Example 1: The offer is at 1/2, the next offer is at 5/8, and a buy order comes in with a 5/8 limit. The ECN can front-run, take the 1/2 offer, and sell to the buyer at 9/16. Net non-risk profit to the ECN is 1/16, or 6.25 cents per share or $62.50 for a 1,000-share order. In a fast-moving stock, it may be necessary to submit a buy order with a limit above the offer in order to get filled. The ECN can take advantage of this.
Example 2: The bid is at 1/4 and the offer is at 1/2 . Two orders come in almost simultaneously, one to buy at 1/2 and one to sell at 1/4 . The ECN can front-run with a 5/16 bid and a 7/16 offer, fill the orders there and make 1/8 or 12.5 cents per share or $125 on 1,000 shares. Note that in this example the buyer and seller would both save 1/16. However, the people on the offer and on the bid won't get filled.
To put these profits into perspective, ECNs charge less than two cents a share, so these profits are huge, and risk-free. In addition, decimalization of the markets will make the situation worse. In the first example, the ECN would be able to skim 12 cents per share instead of 6.25 cents. In the second, the ECN would be able to skim 48 cents per share instead of 12.5 cents.
Something must be done to assure the integrity of our markets.
FRANK YANG
Mohegan Lake, New York |
