Island Book
Monster 101 and Monster 102 must have been duking-it-out lately to see who has the privilege of displaying to Datek's retail customers the book quotes.<g> Of course, Datek says they have no control over the book display - they just execute 99% of our Nasdaq orders through Island but have no responsibility to their customers for reliable or dependable Island book display.
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From the WSJ - December 23, 1998
Electronic Networks Threaten
Trading Desks on Wall Street
By REBECCA BUCKMAN and AARON LUCCHETTI
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- Standing about 2 feet high and perched on the bottom rung of a tall
metal rack at 50 Broad St. in Manhattan, the Compaq computer server called
"Monster 101" doesn't look like a center of trading that handles about 10% of
Nasdaq Stock Market volume.
Looks can be deceiving. Monster 101 and its
backup, a machine dubbed Monster 102, are the
unassuming "brains" of Island, a fast-growing
electronic-trading system run by Datek Online
Holdings Corp., which has become a major player in
individual-investor stock trading during the past 18 months.
The low-budget Island and other "electronic-communications networks," or ECNs,
are proliferating in the screen-based Nasdaq market, a division of the National
Association of Securities Dealers. One analyst, James Marks of Deutsche Bank
Securities, figures the new networks -- pumped up by the recent flood of orders from
active investors trading over the Internet -- are now involved in as many as 35% of
the trades on the Nasdaq, a 27-year-old market that has long been known for
electronically connecting trading desks across the country.
But is Nasdaq about to get even more electronic? Officials of the new ECNs, which
replace some of the human interaction of trading desks by matching trade orders
through a computer, say so. Many market observers say the networks will capture
more volume from Wall Street trading desks as the ECNs lower costs for retail
investors and, increasingly, for institutional portfolio managers, who also like to buy
and sell without affecting the prices of the stocks they trade.
Many already do so now through Instinet, a division of Reuters Holdings PLC that
pioneered the electronic-trading movement.
Critics, though, say ECNs detract from market transparency and could add to
volatility and confusion in the markets, particularly on Nasdaq, which has been
transformed by new regulatory requirements instituted in the past two years.
"All these ECNs aren't necessarily making it easier," says Leo Smith, head of equity
trading at Putnam Investments in Boston. With a multitude of ECNs matching
buyers and sellers at once, often without the same disclosure requirements as
market makers, "it's confusing matters rather than making them simpler."
Despite the complaints, ECNs are booming. Much of the growth has been fueled by
U.S. Securities and Exchange Commission trading rules imposed two years ago
mandating the public display of customer limit orders. After the rules were imposed,
many market makers chose to send the limit orders to electronic systems instead of
integrating them into their own quotes, which could have lowered trading profits in
some cases.
The Big Names in Electronic Trading
Operating "electronic communications networks" ranked by recent market share:
ECN
Owner
Estimated share
of ECN market-a
Instinet
Reuters
69%
Island
Datek Online Holdings
20
Tradebook
Bloomberg
7
REDI
Speer, Leeds & Kellogg
1
Archipelago (Tonto)
Terra Nova Trading
3
Attain
All-Tech Investment Group
0
BRUT-b
Automated Securities Clearance
0
Strike-c
Strike Technologies/
Bear Stearns
0
NexTrade
PIM Global Equities/
Pro Trade
0
a-As of September 1998
b-Other owners include Merrill Lynch, Morgan Stanley, Goldman Sachs and
Knight/Trimark Group
c-Other owners include Donaldson, Lufkin & Jenrette; Salomon Smith Barney; and
Herzog Heine Geduld
Sources: Deutsche Bank Securities, BancBoston Robertson Stephens
Already, the alternative systems are challenging Wall Street's lucrative
stock-trading desks by pitching their services directly to big institutional clients.
Now that the SEC, under recently passed rules, may allow ECNs to become
full-fledged stock exchanges, some observers are predicting they will challenge
Nasdaq and the New York Stock Exchange themselves.
"We've been waiting now for two years for these rules to come into play," says
Jeffrey Citron, chief executive of Dakek Online Holdings. Adds Island President
Matthew Andresen, who graduated from college five years ago: "For us, the
technology is the easy part." ?? -excuse me!
Systems such as Island's, which function as a sort of hybrid exchange/broker,
"really are not and can never be real competitors for Nasdaq and the NYSE," Mr.
Marks says. But in a blistering research note published earlier this month, he claims
that electronic-trading systems pose a "profound threat to the current structure of
the institutional equities business and the core profitability of major Wall Street
firms."
To Mr. Marks and some other analysts, ECNs are to institutional trading desks what
deep-discount, online brokerage firms are to Merrill Lynch & Co. and PaineWebber
Group Inc.: a cheaper, faster way to execute some trades.
Four new ECNs -- Attain, Strike Technologies, NexTrade and BRUT, a unit of
Automated Securities Clearance Ltd. -- have started up just this year. As they gain
critical mass and force commission costs down, more hedge funds and asset
managers could start sending them smaller, "easy" trades, and then perhaps bigger
orders, analysts say. Currently, most institutional brokerage firms charge between
three and nine cents a share for trades, Mr. Marks says, compared with a fraction of
a penny for some ECNs.
Large funds and other wealthy investors have welcomed the tumbling commissions
created by competing ECNs. "We pay about 60% of what we were paying in 1997"
to trade stocks on ECNs, says Harold Bradley, a portfolio manager at American
Century Investment Management Inc., which uses ECNs for more than 50% of its
Nasdaq stock-trading business.
Analysts stress that despite the benefits of alternative systems, securities-dealing
firms will continue to play a major role in many larger, more-complicated trades. But
many Wall Street firms, including Merrill Lynch, Morgan Stanley Dean Witter & Co.
and Goldman, Sachs & Co., have taken equity stakes in the new BRUT system and
intend to send orders there to get a piece of the growing business, as well as to trim
the hefty bills they are paying to competitors such as Instinet.
Other traders say ECNs have reached somewhat of a saturation point.
"It's a commodity business," notes Matt DeSalvo, head of Nasdaq trading at
Morgan Stanley.
They also say ECNs' influence could be curbed by new SEC rules that require
alternative trading systems, including ECNs, to publicly report their best orders
once they control 5% of the trading in a particular security. Under that rule,
"Instinet is the big potential loser," because it has the highest ECN volume and
because many of its customers like the netork's anonymity, says David Whitcomb, a
professor of finance at Rutgers University in New Jersey.
A separate Nasdaq proposal recently sent to the SEC for approval may also hurt by
essentially allowing brokerage firms to have some ECN-like capabilities.
Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.
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PS:
When is Datek going to become a real broker and allow Nasdaq margin and shorts again... haven't they driven enough customers away yet?
IMO, nick |
