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

To: gbh who wrote (3888)	9/11/1999 7:57:00 PM
From: Gary Korn	Read Replies (2) \| Respond to of 10027

Gary, you are correct about the payment procedure for Nasdaq issues. But consider this. The big OLBs are all starting to take ownership positions in the ECNs. Gary, Blankmind suggested that these ECN-stakes are likely in the nature of "hedge your bets" maneuvers, and indeed part of a herd mentality at the moment. Even NITE has its ECN (BRUT). I don't doubt that there will be competition for order flow. Heck, there was competition for order flow long before NITE hit the scene. However, NITE established a business model that says, "we don't care how thin the spread, we'll take your order and make the execution." When the spreads in fact thinned, the old-time houses dropped scads of stocks in which they had been making markets. More of the same will continue (regional market makers will have an increasingly tough time making a living off of decimalized spreads), and market share will continue to be abandoned to NITE. Your issue of whether OLBs will send order flow to ECNs because they have ownership interests in ECNs is interesting. Let's look at the issue: We know that an ECN makes NO money on the spread. So, no money there. Instead, the ECN makes maybe $2.50 liquidity fee on a 1,000 share trade of INTC (I'll assume that it would get that for a market order). If instead the order is sent to NITE, and the spread is 1/16th, NITE makes $62.50. Of this, it sends about $5 (could someone help here) to the OLB. So, the OLB has a choice: (1) It can send an order to an ECN an make an indirect $2.50 from liquidity fees (and remember, some trades add liquidity and get NO fee, but instead pay a fee out). I say indirect because the OLB gets no direct payment, just some share of the profits from its stake in the ECN venture. (By the way, the customer has to be induced to select this option, because he/she will have to pay that extra added liquidity fee.) (2) It can send an order to NITE and make a direct $5 (or more) in order flow fees. Plus, if you look at the gross profit from a 1/16th spread, which is $62.50, you can see that NITE has room to increase the payment for order flow where necessary to meet the competition. I know what I would choose. Another very interesting thought comes to mind: KP has said, in the Fortune article, that he would love to see payment for order flow go away. Of course he would, since that would save NITE plenty of money. What one factor would do most to cut NITE's payment for order flow expense? It is ECN competition! Think of it this way: The more ECNs that are out there, the more they will compete for order flow, and the lower they will reduce their liquidity charges to entice that flow. Well, if the ECNs lower their liquidity charges, then their investors will profit that much less (and/or the ECNs can pay less to OLBs in direct payments), meaning that NITE itself can pay less for orders while still having the same price advantage. Cool! Gary Korn P.S. I think that NITE may not now pay order flow fees for limit orders (which is why the OLBs charge more for such orders). When/if necessary, I assume it would make such a payment in order to beat the competition. P.P.S. Being able to trade a spread is a very profitable thing, something the ECNs don't do. That profit can, in my opinion, be used to do a lot of "convincing" of others to send orders a particular way. But what do I know!