ECNs Take Hold as Active Investors Gain Ground: Taking Stock New York, May 4 (Bloomberg) --
Electronic trading network
Island ECN Inc. has exchanged more shares of Intel Corp. than any
other firm this year, marking the growing influence of a new group
of active investors who demand fast, inexpensive trading.
Island is one of about a dozen such networks, or ECNs, that
automatically match investors' orders to buy and sell stock,
narrowing spreads for investors while lowering transaction costs
and executing orders faster than traditional Nasdaq market makers
that trade stocks manually.
The older firms, which include units of the second- and fifth-
largest securities firm, Morgan Stanley Dean Witter & Co. and
Goldman Sachs Group Inc., often commit their own capital to help
provide liquidity in lightly traded stocks. ECNs don't commit
their own capital to execute trades.
``A lot of our order flow has gone'' to trading systems like
Island, said Bobby Earthman, president of Tradecast Ltd., an
online brokerage that offers investors direct access to electronic
networks. ``It's certainly fueled the growth of active
investing.''
The most-active individual investors -- day traders -- are
the biggest customers of Island and its ECN competitors, which
include Bloomberg Tradebook, a unit of Bloomberg News's parent,
Bloomberg LP. Institutions like mutual funds still rely heavily on
market-makers to move large orders of stock and get them the best
price.
There are some 50,000 semi-professional traders who make 25
to 40 trades a day, followed by about 3.85 million ``active
investors,'' who make 25 to 50 trades a year, according to Bear
Stearns & Co. analyst Amy Butte.
Growing Volume
In the first quarter, Island traded 129.6 million shares of
Intel, accounting for 7 percent of the stock's activity. Morgan
Stanley traded 107.7 million shares, while Goldman executed 105.9
million shares. Combined, those two firms accounted for 11 percent
of the trading in the world's largest computer-chip maker.
While institutional money managers still execute most of
their trades through traditional firms like Goldman, Salomon Smith
Barney and Merrill Lynch, they're not the first choice for the
growing number of day traders in the U.S.
Day traders tend to use direct-access brokers -- like those
offered by Datek Online Holdings Corp. and Tradecast. The software
these brokerages offer gives investors the option to choose where
to send their orders to be executed.
Investors have also turned to online brokerages to manage
their own investments. The growth of self-directed investing has
helped fuel the explosion of day traders.
In March, the top four market makers for Nasdaq stocks were
firms that specialize in matching orders from individuals, not the
block trades made by institutions. Schwab Capital Markets, Knight
Securities Inc., Spear Leeds & Kellogg and Herzog Heine & Geduld
Inc. topped the list, according to data from Autex/Block Data,
which maintains a database of daily broker activity.
`Losing Out'
``The traditional market makers are losing out on . speed,
anonymity and cost,'' said Morgan Stanley Dean Witter analyst
Henry McVey. ``Until those firms change their model, there's the
potential for the incumbents to continue to lose market share.''
As for Intel, in April 1999, the leading market makers were
Morgan Stanley & Co. Inc.; Merrill Lynch, Pierce, Fenner & Smith
Inc.; and Salomon Smith Barney. Schwab Capital Markets, Knight and
Island ranked fifth, sixth and 10th, respectively.
Goldman and Schwab Capital Markets didn't return calls
seeking comment.
Island jumped to the top of the list for Intel in January --
and stayed there -- from No. 8 in December and November.
Island's success is in part a result of its customer base.
While about 250 brokerages feed orders into its system, a large
percentage of its orders come from direct-access brokerages that
cater to the most-active investors.
``It's much cheaper to put my orders on Island or another
ECN,'' said Ronald Shear, president of trading firm Carlin
Equities Corp. ``A lot of the direct-access systems search the
ECNs for a match first.''
Said Morgan Stanley's McVey, ``Island has great technology,
but they also have a corner on the active-trader market, which
gives them great access to volume.''
Island is dominating more than just activity in Intel. In
March, Island traded 57.5 million shares of Oracle Corp., making
up 8 percent of the stock's volume. Again, Schwab Capital Markets
and Goldman followed in the second and third slots.
Island is now creeping toward the No. 1 position for two more
widely traded Nasdaq stocks, Microsoft Corp. and Cisco Systems
Inc. Island was the second- and third-most active participant in
Microsoft and Cisco in March, respectively.
Said McVey, ``The question is, do they begin to more
materially penetrate and crimp revenue of traditional investment
banks?''
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