Here is the article on ISLAND. MUST READ!
Maverick restyling America's markets
Executive leads charge in stock-trading
revolution
02/20/2000
By Bill Deener / The Dallas Morning News
NEW YORK -- If there is a ground zero for the revolution
sweeping through the U.S. securities industry, it's probably
located in the spartan Manhattan offices of Matt Andresen.
At age 29, he is president of The Island ECN Inc., an electronic
meeting place for buyers and sellers of stocks, and one of about a
dozen quasi-stock exchanges called electronic communications
networks, or ECNs. He and a handful of his tech-savvy cohorts
are transforming the way stocks are traded in America.
Through Island and other electronic communications networks,
millions of small investors electronically post buy and sell orders
over computer networks without the intrusion or the expense of
brokers or Nasdaq market makers. The industry, which few
people had even heard of two years ago, now accounts for about
one-third of the volume on the Nasdaq stock market.
Mr. Andresen calls this "democratizing" stock trading, or more
specifically, eliminating the "middlemen profiteers."
"This idea is so simple and powerful that people who currently
make money from the inefficiencies in the market should be
concerned about their profit margins,' he said. "But it's not the
duty of the American public to subsidize those who profit from
these inefficiencies."
In the basement of Island's Wall Street headquarters, Mr.
Andresen walks to a computer not much bigger than a briefcase,
points to the black box and proclaims: "That is Island" -- one
computer ordered off-the-shelf from Dell Computer Corp. that
handles 100 million shares a day, or about 7 percent of Nasdaq's
daily volume.
Experts in online trading give Mr. Andresen much of the credit for
the growth in alternative stock trading systems such as Island.
That's because he was among the first to recognize that a
little-noted 1997 change in securities regulations could
fundamentally change the way stocks are traded.
"You look back now and see that a seemingly insignificant ruling
at the time had vast repercussions," Mr. Andresen said. "I like to
think I recognized that."
Price of success
Mr. Andresen's very success, however, may be one of his biggest
challenges. The big stock markets, which he derides as
slow-moving bureaucracies, are taking notice and striking back. At
the other end of the spectrum, a slew of competitors has sprung
up, leading analysts to predict a coming shakeout in the crowded
ECN field.
"The Nasdaq and the New York Stock Exchange will wake up,"
said Jaime Punishill, a securities analyst for Forrester Research
Inc. "They aren't going to roll over and play dead. It's going to
come down to who has the best technology."
Mr. Andresen (pronounced an-DREE-sen) was a struggling
day-trader at Datek Online in New York when he learned that the
U.S. Securities and Exchange Commission had passed a rule
governing the way stock prices are displayed over the Nasdaq
trading system.
The rule requires that Nasdaq market makers, who ensure liquidity
in stocks, allow the posting of orders that fall between their bid
and ask prices.
The bid is the highest price that someone is willing to buy and the
ask is the lowest price at which someone is willing to sell. The
difference between those two prices is known as the spread and
represents the market maker's profit.
"For me to be able to have my orders displayed over the Nasdaq
system was an absolute seminal event," Mr. Andresen said. "It's
the difference between trying to sell your house with a sign in the
yard or without a sign. I was like, wow, this changes everything."
The rule was passed after the SEC found in a 1996 investigation
that market makers rarely posted orders that fell between their best
buy and sell prices. That's because the larger the spread, the more
profit they make.
Before this new rule, the only alternative to the traditional
brick-and-mortar trading firms was Instinet, a private electronic
communications network owned by Reuters PLC that primarily
handles trades for large institutions. Since the new rule, at least a
dozen ECNs have sprouted.
Not surprisingly, spreads on Nasdaq stocks have collapsed from
an average of about 25 cents to a more respectable 13 cents, which
is about the average spread of NYSE-listed stocks.
Marketplace mover
Mr. Punishill, the Forrester analyst, said Mr. Andresen and Island
were "out front early" after the rules changed.
"[Mr. Andresen] saw it coming, so you have to give him credit,"
said Mr. Punishill. "Island has been a mover in just about every
aspect of the new marketplace, whether it's after-hours trading,
ECNs or technology."
The man behind all of this change isn't your typical Wall Street
executive. Mr. Andresen sports a shaved head and goatee and
spikes his conversation with expletives. He unapologetically
munches on cream-filled doughnuts chased with orange soda
during an interview in his Manhattan office -- a no-nonsense
cubicle, outfitted with a desk, table and computer.
He was raised in Chapel Hill, N.C., where his father taught at the
University of North Carolina. His father, Dr. Jeffry Andresen,
now teaches psychiatry at the University of Texas Southwestern
Medical Center at Dallas.
Mr. Andresen graduated from Duke University with an economics
degree and was a four-time fencing All-American. After
graduation, he was lured to New York, not by the call of Wall
Street, but by the New York Athletic Club. He wanted to compete
in the 1996 Olympics, and that's where the best fencing coaches
were.
Mr. Andresen didn't make the Olympic team, but he stayed in
New York and landed a job at Lehman Bros. as a trader, although
the job fell short of his expectations..
"I'm not kidding. I really tried to become a trader, but about all I
ever did was go get coffee for the older traders," Mr. Andresen
said.
He said he quit before he was fired and began day-trading at
Datek. And then in mid-1998, a year after the SEC ruling, he
joined Island as president. At the time, the fledgling brokerage
firm had five employees, virtually no marketing team and only a
handful of customers.
From ground up
The founder of Island, Josh Levine, who had developed the
software to run Island, stood aside and let Mr. Andresen build the
company from only a handful of customers to more than 260
online brokers, dealers and day-trading firms. Small investors
typically gain access to an electronic communications network
through one of the major online brokerage firms, such as Datek or
E-Trade.
Island is now by far the most successful electronic
communications network among those serving small investors. Its
closest rival, Chicago-based Archipelago, handles only a third of
Island's volume.
But Mr. Andresen doesn't plan to stop there. In June 1999, he
applied to the SEC to become a registered exchange, which would
make it easier for Island to handle shares of companies listed on
the NYSE. Mr. Andresen is hoping the SEC approves Island's
application this year, but he's been given no timetable.
"I believe the SEC will approve it," he said. "We have a proven
track record, but I have no idea of when."
Also, if Island becomes an exchange, it can sell the data derived
from trades, namely prices and volumes. Mr. Andresen said Island
is profitable now but won't release specifics on earnings or
revenue.
Trading NYSE-listed stocks also would greatly enhance Island's
liquidity, which is the lifeblood of any market. In fact, all of the
electronic communications networks must increase the number of
buy and sell orders they handle if they are going to compete
against the Nasdaq and NYSE, said James Marks, an electronic
commerce analyst at Credit Suisse First Boston.
He refers to the Nasdaq, which daily handles more than 1 billion
shares, as "the biggest dog with the nastiest bite," and ECNs had
best not forget that. In fact, the Nasdaq is spending $200 million a
year on new technology, he said.
"The major exchanges have to really, really screw up to lose their
position,"said Mr. Marks, "and that's unlikely. The Nasdaq is not
going to be complacent in the face of the changes rolling through
today's trading environment."
Harsh reality
The reality is that most of the ECNs will probably go out of
business, he said, because they won't be able to generate enough
liquidity. Island and Instinet, however, will be the notable
exceptions because they have sufficient liquidity, Mr. Marks said.
Erik Sirri, professor at Babson College in Wellesley, Mass., and
an expert on ECNs, said the alternative trading companies are
fooling themselves if they think they will one day replace the
Nasdaq. The Nasdaq's market makers and the NYSE's specialists
are critical components to maintaining a liquid market -- that is,
making sure that buyers and sellers can be efficiently matched up.
"That's not to say that the Nasdaq five years from now will still
look like it does today," said Mr. Sirri. "It may become more like
an ECN or something else. The Nasdaq is going to move. You can
count on that."
Nasdaq spokesman Scott Peterson agrees. While narrowing
spreads and increasing market liquidity have benefited all
investors, he said, the idea of electronic communications networks
trying to morph into exchanges is another matter altogether.
"The Nasdaq stock market has thrived on competition since its
earliest day," said Mr. Peterson. "We will stand up to any
challenge and by no means are we complacent. We are watching
the situation. We are not standing still."
Even Mr. Andresen concedes that many of the ECNs won't be
around three years from now, although some of Wall Street's
biggest names -- including Goldman Sachs Group and Merrill
Lynch & Co. --have invested in electronic trading networks.
But in one sense, he contends, ECNs are already successful. In
just the last six months, both the Nasdaq and NYSE have
announced plans to extend trading hours and possibly become
public companies. The ECNs are forcing these changes, he said.
"The sooner we make them compete, the sooner they will adjust,"
Mr. Andresen said. "But believe me, they will not do it an hour
sooner. And every hour that we are not able to compete is bad for
the investor."
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