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

To: Keith J who wrote (4765)	10/9/1999 8:16:00 PM
From: Gary Korn	Respond to of 10027

my biggest concern with NITE is not ECNs currently, but rather the eventual changeover to decimal pricing system, which will probably cut margins more. But that will also probably drive more MMs from the market Decimilization will, as you note, have several impacts: 1. It does mean thinner margins. However, this will drive regional and smaller MMs out of the market, which should increase NITE's market share. It will continue a process that has already seen players like MER reduce the number of issues they make a market in from over 2,000 to about 500 or less. In sum, with thinner spreads, NITE should make less per transaction but handle more transactions. 2. Decimilization, it seems to me, also poses a problem for ECNs. Whereas a 1/16th spread offers at least some chance for limit orders to match off against one another, what happens when the spread is 1 penny? That is some 6 times as many pricing options, all within the same 1/16th. Just as they take in more orders to increase liquidity, the ECNs face the fractionalization of the same orders, decreasing liquidity. It is an interesting conundrum. Mike Murphy recommends NITE (target 65), and estimates that NITE makes about 1 cent per share on retail trades and 6 cents per share on institutional trades. So institutional trading is pretty important Institutional trading is important. In the last quarter, it was 20% of NITE's business, and is supposed to be the fastest growing segment of company revenues. Morever, there are revenues to be found beyond just U.S. institutional trading. The London office of NITE is dedicated to generating European institutional business (for trading in U.S. equities). We're not even talking, here, about the Euro OLB business, which won't get off the ground until late 2000. Nor are we addressing the options business (ISE). There are a lot of irons in the fire. Gary Korn

To: Keith J who wrote (4765)	10/9/1999 8:36:00 PM
From: gbh	Read Replies (2) \| Respond to of 10027

Besides, it's my understanding that ECNs will only deal with limit orders....market orders still have to go thru a MM. KJ, this isn't exactly accurate. Datek's ordering routing procedures allow market orders to be matched on the Island ECN. This may be a special case due to Datek's majority ownership of this ECN. Not sure if other OLBs would have a similar incentive to route market orders this way. Let me give you an example. If I place a market order to buy a stock, and there is currently a matching offer to sell on the ISLD ECN, Datek will route the order there and instantly fill the order, generally in less than 1 second. Only if there is no ISLD offer, then the order is Selectnet'ed to the market for a fill. I'm not sure if they receive payment for order flow now (I know they did not use to). And if anything, the continuing reduction in trading costs (i.e., AXP free trade announcement, EGRP volume discounts, etc) will continue to drive increases in trading activity. That said, I wouldn't want to own any of the OLBs. I agree with this 100%. I was considering these OLBs, namely SWS and NDB, but never pulled the trigger. estimates that NITE makes about 1 cent per share on retail trades and 6 cents per share on institutional trades. So institutional trading is pretty important. The 1 cent number is interesting. I would guess the "majority" of orders executed earn .0625. Subtract from this the payment for order flow and you probably arrive at the .01 number. I'd guess the "minority" orders that make more than .0625, and those that make less than .0625 (yes, they do lose money on many, many executions) probably cancel each other out. Or at least that's what they count on :) Its amazing that with such a razor thin trading margin, that they only have had a few "losing" trading days (this was asserted by KP in that Fortune interview). Gary