Observations on Roles, re 4055, 4056, 4057...
More on 4056:
At a market maker (a 'dealer', as opposed to a broker), liquidity is provided by either 1) a matching customer order on the other side of the trade (a 'natural') that the dealer is currently working, or by 2) the principal bid or offer from the market maker for their own account (generally at the inside market quote, unless the dealer is willing to come across the spread, say to mid-spread, to get a trade done). The dealer provides liquidity to the market, puts their capital at risk, and attempts to earn the spread (a sixteenth, an eighth, etc.).
At an ECN, liquidity is provided by the participants? orders held on the matching book of the ECN. Note, 'Participants' may mean individual retail customers, institutional money managers, hedge funds, other ECNS, or even other market makers, such as Nite, Herzog, Goldman, etc. The ECNs charge relatively modest fees to transact. Some charge you for when you remove liquidity (by hitting a bid or an offer) and actually pay you when you provide liquidity (enter a bid or offer at a limit on their book). Of course, you only get paid for providing liquidity when someone hits your bid/offer.
ECNs have a many uses, one of which is to provide anonymity. E.g., A dealer who is getting short on NASDAQ Level III can be simultaneously covering anonymously on various ECNs.
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4055:
An ECN could absolutely direct order flow to NITE? Absolutely Yes,if NITE were the current best source of liquidity. E.g., Archipelago (owned by Goldman, Etrade, CNBC, TerraNova, et al) has an intelligent order router that seeks the best bid/offer from all available sources of liquidity that it can access, including market makers, exchanges, its own book (#1!), etc. There are, however, limits to the intelligence of these routers. One nice thing is it can scan, compare, and rank fifteen different sources of liquidity faster than a human can look at a Bloomberg.
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In Re: 4057
Merrill and NITE are competitors: on their trading desks. However, Merrill also has (I believe) the largest clearing operation on the Street (Merrill/Broadcort). Clearing refers to settling the trade, issuing confirms, etc. NITE sought out the low cost provider of clearing. Good for NITE. Merrill probably cut NITE a good deal, possibly at zero current margin to Merrill. (I might if I were Merrill.) However, the marginal cost to Merrill is slight, they have available capacity, and when NITE?s volume goes from ~300,000 trades per day to ~1,000,000 trades per day, Merrill will do just fine. All just my supposition.
As to being fierce competitors, everybody on the Street is a fierce competitor to every other participant - unless or until one can figure out a way that by working together, both parties can make more. Why else would you ever see Goldman and Merrill, or Goldman and Morgan in the same deal? Did they suddenly get charitable? Not likely. Just a professional's appreciation that, for a variety of very complex reasons which vary from deal to deal, their long run chance of success is greater with the co-manager in. Merrill respects NITE. NITE respects Merrill. Work a deal on the side, if it works. Victory/gains to the best (luckiest?) in trading.
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All my personal opinion of how it fits together.
Best to you all in these markets! |
