<<all of the acronyms stand for>>
ECN - electronic communications network. Basically, you bypass MMs (market makers). Market Makers, as the name implies are supposed to create a market for a given security. A market maker has the obligation to be on both sides of trades (i.e. he must post shares for sale, and shares he's willing to buy). If someone comes along, and wants to sell XYZ, but there are no buyers, an MM is supposed to act as the buyer. He takes a risk in that. This gives him the right to SET THE PRICE as he sees fit (depending on what he thinks will be most conducive to the creation of an orderly market). The MM profits by grabbing the spread between the bid and ask. The MM is not the same as the specialist who works listed issues, and while there are similiarities, there are differences as well. It is my view, and not only my view, that MMs are mostly thieves preying on investors and traders. They have largely abandoned their duty to make markets. Now they concentrate on short selling, manipulating, arbitraging and illegally cheating traders with a variety of tricks (NASD and SEC regulations were designed to reign them in, but MMs always find ways around this). In my view, other than really making a market in illiquid, rarely traded issues, MMs have no function - they are parasites, thieves and con men.
Whew! Had to get that off my chest - as a trader, I really hate MMs. In any case, partially as a response to the abuses by MMs, ECNs have grown in popularity. These are basically electronic limit order books, which automatically match buy orders with sell orders. An order that does not have a "match" can stay on. Obviously, since that can happen often, ECNs cannot be under the obligation to take the other side of the trade, as an MM must. So, on LII, you will often see an ECN on a bid, but not on the ask, or vice-versa. The first ECN, was developed for institutional use, and is controlled by a unit of Reuters Group PLC - the Instinet Corporation, commonly called instinet, and the symbol for it is INCA. This is the largest ECN, with the highest volume. A lot of trading outside of market times is done on INCA. To this day, most trading on Instinet is done by institutions, though individual traders at direct order entry brokers can have access to INCA (usually through the broker). ECNs make their living by charging a fee for every use. Other ECNs soon followed. The next largest is Island, symbol ISLD - controlled by Datek Corp, the holding company for Datek Online. ISLD was developed for individual traders, and to this day, is largely the province of individual traders. Its growth is the fastest of all ECNs. Frankly, without ISLD, we traders would be lost - I do almost all my trades through ISLD. Other ECNs are: Bloomberg Trade Book (BTRD), Spear, Leeds, and Kellog (REDI), TerraNova Trading LLC (TNTO), Strike Technologies, LLC STRK, NexTrade (NTRD), All-Tech Investment Group (ATTN), BRUT, and more ECNs are coming online. The landscape is changing, as some ECNs (ISLD, INCA) are evolving toward exchange status etc, but basically ECNs are taking an increasingly greater share of trading away from MMs (at this point, they are moving toward a third of all trades on Nasdaq). This is generally good in so far as it limits the MMs (though they can still mess with traders by Sneting shares, breaking price momentum, atomizing orders etc.). Some limitations are obviously that the market gets split among many ECNs, and a trader has a lot more ground to cover. There are proposals for one large book consolidating all orders (INCA proposal), but it won't be easy to achieve, given the vested interests of separate ECNs. Also, institutions may start to dominate trading in ECNs too, and that would put the retail trader at an disadvantage (personally, I'd hate to see ISLD killed by institutional trading).
Hope this helps.
Morgan |
