From N.Y. Times:
The boom in electronic communications networks was actually encouraged by rule changes intended to improve the Nasdaq market.
Those rules allowed electronic communications networks to post orders from their customers on Nasdaq computer screens. Each time one of these orders was filled through the Nasdaq system, the E.C.N. received a small commission.
Those potential profits encouraged big Wall Street firms and others to form their own private trading networks.
There are now at least a half-dozen of these private networks, which make it harder for even professional investors to find the best trading prices. "The concept of a central marketplace has gone out the window," complained Victor Babin, senior vice president and director of equity trading for the Oppenheimer Funds.
"I now have to check four, five, or even six different markets to be sure I'm getting the best price."
Market fragmentation is especially onerous for amateurs, said William C. Freund, a market economist at Pace University.
Individual investors may not realize that low commissions for on-line trading may not make up for the extra money they can spend if they do not find the best market price for their shares.
Nasdaq is trying to knit its market together again. By the end of the year, for example, the prices at which trades are conducted on E.C.N.'s will be included in Nasdaq's consolidated price quotations.
It has also proposed more sweeping changes that would incorporate features of the Big Board's face-to-face trading floor into Nasdaq's electronic environment. Specifically, Nasdaq dealers would be able to electronically match up buyers and sellers, for a fee.
That would help Nasdaq compete with the electronic trading services, a senior market official said. But the N.A.S.D., like the Big Board, has also been discussing the possibility of joining forces with some of those trading services, notably Instinet, to create a new Nasdaq structure.
Zarb of the N.A.S.D. would not discuss the talks, but Douglas Atkin, chief executive of Instinet, said the conversations had grown "more frequent and serious in the past six months."
Instinet and many of its counterparts now have a substantial competitive edge. Unlike Nasdaq and the Big Board, they allow investors to trade anonymously.
Influential investors like Fidelity Investments can sell a substantial amount of stock more easily if others do not know that they are shedding shares.
But some market experts worry that Nasdaq and the New York exchange will be pressed to extend the same secrecy to large investors, or risk losing trading volume to the competition.
Foreign competition could ratchet up the pressure, Professor Coffee said. Some foreign exchanges do not require stock prices to be reported as promptly as in the American market.
Nasdaq prices must be disclosed within 90 seconds; in London, the deadline is 24 hours -- a boon to major investors but a big disadvantage to smaller players.
Both Grasso and Zarb said they were confident that market leaders and the Securities and Exchange Commission could preserve the transparency and fairness of the American marketplace.
But they emphasized that regulators must take "a leadership role." With an informal nod from the S.E.C., the N.A.S.D. is recruiting a committee of top Wall Street executives to study how the public will be affected by these pressures, senior market officials said Friday.
Meanwhile, Americans face the possibility that their market leaders may still be working on the ark when the rain begins.
What happens if stock prices plunge, spreading panic among the ranks of newly empowered investors, before the marketplace is finished reinventing itself?
Most likely, market leaders agreed, investors will stampede back to the time-tested institutions -- the Big Board and the Nasdaq.
"If there's a downdraft," said Zarb of the N.A.S.D., "the trading comes back to us."
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