What is an ECN?
An ECN (Electronic Communications Network) is a limit order book comprised of hundreds or thousands of limit orders. The best bid and ask limit order for each stock are communicated to Nasdaq for display as the bid/ask quote for the ECN.
For example, assume the following limit orders are on the ISLD book for stock WXYZ:
Buy 100 shares at 80 1/8 *
Buy 2500 shares at 78
Buy 200 shares at 80
Buy 300 shares at 80 1/8 *
Sell 1000 shares at 81
Sell 500 shares at 80 1/2 *
Sell 100 shares at 84
At this time, the best (*) bid price on the book is at 80 1/8, with a collective size of 400 shares. The best ask price is for 500 shares at 80 1/2. Therefore, the Nasdaq Level II display would show these best bid/ask prices and sizes as the current ISLD quotes.
There are currently nine ECNs: ISLD (Island), ARCA (Archipeligo), INCA (Instinet), BTRD (Bloomberg Tradebook), REDI (RediBook), ATTN (Attain), STRK (Strike), BRUT and NTRD (NexTrade). All other quotes seen on the Level II display are market makers. On some Level II displays, ECNs will be shown with a "#" after their symbol, such as ISLD# or ATTN#. This is to help quickly identify those quotes that are from ECNs.
There are hundred of market making firms, some of whom are GSCO (Goldman Sachs), MLCO (Merrill Lynch) and MSCO (Morgan Stanley), just to name a few.
There are huge distictions between market makers and ECNs:
Characteristics of ECN's:
1) ECN quotes are 'real'. If you see a quote on an ECN, it is a real quote at that price and at that size. If you are the first one to send an order to execute against an ECN quote, you will get filled. No market maker games, here.
2) ECNs will show their entire size (unless the originator of the order has specifically requested that his/her order not be displayed, i.e. 'hidden' or 'subscriber-only' ISLD orders). If an ECN has collective orders of 14200 shares to buy at its best price of 81. You will see all 14200 shares displayed on your Level II display.
3) Price increments. Nasdaq will only display prices in increments down to 1/16's for stocks priced above $10 and down to 1/32's for stocks priced below $10. ECNs, however, will quote prices in much finer increments. ISLD, for example, allows for orders priced as finely as 1/128 for stocks above $10 and 1/256 for stocks priced below $10. Note, however, that the order price will be rounded to the next lower 1/16 or 1/32 increment for these ISLD bids when displayed on the Nasdaq Level II display, and rounded to the next higher 1/16 or 1/32 for display of any ask price for display on Nasdaq. => I.e. An ISLD bid of 16 1/64 will be display on Nasdaq at 16 even. An ISLD ask of 16 1/64 will be display on Nasdaq at 16 1/16.
Characteristics of Market Makers:
1) Market maker orders are not always 'real'. In active stocks, you will rarely get a fill against a market maker at the inside bid or ask unless the stock is about to quickly go in the adverse direction. This is due to the 17 second rule:
2) Market makers are only required to fill a single 100 share order at their price every 17 seconds. As a result, when a market maker is displaying a 100 share quote and is the sole quote at the inside ask, they need only fill 400 shares per minute in order to clog up the stock movement and remain at their current quote. During this time, there may be 10-100+ orders sent to them totalling 100,000+ shares to buy stock from them at their quoted price. However, the market maker need only fill 100 shares every 17 seconds. At any time, he/she is then able to withdraw their quote and not fill any additional orders. Therefore, don't count on getting filled from them!
3) Size. Market makers can display any size they want, down to as little as 100 shares. As a result, they will often post this minimum size, regardless of their true size. From their posted size, you have no way to determine if they are really only prepared to sell 100 shares, or 100,000 shares at their price. |
