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Non-Tech : Knight/Trimark Group, Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Gary Korn who wrote (3861)	9/9/1999 11:53:00 PM
From: Herschel Rubin	Read Replies (1) \| Respond to of 10027

Re-post from Motley Fool. Interesting discussion: boards.fool.com Subject: Re: CNN Article on ECN's Date: 9/9/99 9:56 PM Author: babybull Number: of 5901 From the article: "To survive, market maker brokerages would become more speculators than arbitrageurs...making money from stocks rising or falling rather than price inequities." This is similar to an argument we had on this board before, in regard to whether NITE makes its money from spreads or price movements. Arbitrageurs make money on price differences (spreads), speculators make money on price movements. Eric, among others, has put NITE in the latter category, although I think he would disagree with the term "speculator." His argument is that NITE has an informational advantage--based primarily on knowledge gained from limit orders that are placed with NITE. One problem with this argument is that ECNs are taking a larger and larger slice of limit orders. So even if one were to say NITE has an informational advantage, wouldn't that advantage disappear as a smaller and smaller percentage of NITE's trades are limit orders? (I, on the other hand, much prefer that a high percentage of NITE's trades are market orders, since the spreads are much higher). Now, the CEO has spoken of his "propriety trading methodologies" that he has developed over his decades in the business. So maybe no informational advantage is needed--he has a system in place to tell him when to buy and when to sell, based no doubt on trading volume, 30-day moving averages, support, resistance, dead cats, and other witchcraft crapola. I don't believe in fairy tales, and based on the hit our company has recently taken, the market doesn't really believe in this argument, either. NITE, in my opinion, will always need a spread to be profitable, needs, in other words, to be an arbitrageur rather than a speculator, to make money off of price difference rather than price movements. So is NITE a bad investment? No, in fact it's a terrific investment. Why? Because there will always be a spread, albeit a small spread. But the spread does not have to be large--a penny a share is more than enough. The volumes are that large, and in fact will continue to grow. Why must there always be a spread? Because, if NITE must speculate (or, if you prefer, hypothesize) about where a stock price is going in the near term, then it would save its money for its "best bets." It would buy and sell companies that it had the most information on, or companies that it felt had strong business models (buys) or weak ones (shorts). NITE doesn't act this way. Never has. Instead it buys thousands of companies, many of which are thinly traded (hence little informational advantage) and little known. Why would it do this? For the same reasons the overwhelming majority of day-traders lose money--the spread. NITE makes money on all those pennies, and millions of pennies add up. Without the spread, without those pennies, there would be no reason for NITE to play "market maker." Instead it would pick its spots. And this is why Marenzi and the rest of the ECN crowd are simply clueless. Without a spread, there won't be a market maker. Without a market maker, there won't be a market. Even if the stock market, right now, seems to have forgotten the importance of a market maker, you can bet the SEC understands it (which is why they allow a spread to exist in the first place).