To: agent99 who wrote (6858 ) 3/28/1999 3:26:00 PM From: Morpher Read Replies (1) | Respond to
Moreover, although commissions to trade online are indeed rock bottom, there are hidden costs in using the networks. Prices on these networks are inferior on 8 out of 10 stocks they trade, according to the National Association of Securities Dealers. In large part, that is because investors are trading only with other investors who are using the same network, rather than "meeting" all other investors in the broader NASDAQ marketplace. Frustrations over poor prices or trades that were not executed at all have led some experienced investors to wonder whether something is amiss between the time orders are placed and the time they show up on an ECN. "The upside is that investors are getting that meeting possibility," said Richard G. Ketchum, president of the NASD. "The downside is that they are not getting any execution guarantee." The networks now account for about 20 percent of trading in NASDAQ stocks -- more than the volume on the American Stock Exchange and all the nation's regional stock exchanges combined. The ECNs split up the market even more. When fewer trades are posted in one place, it is less likely that orders to buy and sell at the same price will find each other. "If the volume is going on in one place, and you are at another, you won't get executed," he said. Or say an investor has placed a limit order -- an order to buy stock at a set price -- on an ECN. If there is no seller willing to take the other side of the trade at that price, his order remains unfilled. Even then, this time lapse -- maybe just a few seconds -- can be costly. ECNs, unlike market makers, charge other dealers to execute on their networks, increasing costs. The temptation to trade ahead of a customer is greatest when investors place market orders, meaning that they will buy or sell at the prevailing price. Mazzeo points to numerous examples of market orders that he placed with Datek Online and Island ECN that were not executed for minutes at a time, or were executed at prices that to him were suspiciously off the prevailing market levels. On Jan. 15, Mazzeo put in an order to sell 500 shares of Network Event Theatre, a small NASDAQ stock that rarely trades. The bid price on the stock was $13.8125 when he placed his market order on Datek Online. While most large, reputable market makers stand ready to buy or sell 1,000 shares of the stocks they trade -- they are required to handle 100-share trades -- ECNs do not. You get to a point of uncertainty and no one is going to sit out there and say they are a buyer during a market break," said Ketchum of the NASD. "If markets drop, ECNs have a harder time providing liquidity."
