FROM Barron's - April 19, 1999
No Man Is an Island. But Can An Island an Exchange Make?
Edited By Robin Goldwyn Blumenthal
It's great to be an upstart, as Island ECN, an automated trading network, can attest since its formation 2 1/2 years ago. But Wednesday, when SEC rules change to allow alternative trading systems to become full-fledged exchanges, Island, the first to say it will go that route, heads down an uncertain road whose end is anything but clear.
"As the test case, we're working very closely with the commission on the framework of the exchange," says Matthew Andresen, Island's 29-year-old president. He estimates it'll take six to 18 months to file, and cost in the "tens of millions of dollars" to develop the infrastructure, and then up to $10 million a year to operate as a self-regulatory organization.
The new rules "should benefit the industry and investors," says Bernard L. Madoff, head of an investment securities firm and the SIA's trading committee. For Island, one big advantage to exchange status will be access to the New York Stock Exchange. Island, a unit of Datek Online Holdings, is a computerized auction system for Nasdaq stocks through which broker/dealers, many representing retail online investors, can match bids and offers. Island is regulated by the NASD, and pays Nasdaq over $1 million a month to report its trades and obtain quotes.
Island, which claims speedier, cheaper and anonymous services for the 200 broker/dealers who subscribe free to its service (it's available to any dealer with access to SelectNet for $1 a trade) is banking on huge volume to drive its revenues. It now makes its money (Andresen says it's profitable) from "razor-thin" margins -- 1/15 of a penny per share on trades.
Meanwhile, the Big Board may be doing an end-run around Island. Although it's talking to all 10 ECNs (which the SEC says account for 20% of Nasdaq transactions), reports have named five Island competitors -- most backed by Street firms -- that the NYSE may ally with to enable trading in Nasdaq stocks off its platform. But Andresen welcomes the competition, and says Island can succeed without being an exchange. Only time will tell if Andresen, a championship fencer, will be hearing "touche" from his competitors.
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
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