Marie Carone

Broker-dealers Exchange Limit order Limit order books Institutional investors Market-makers OTC trading

Off-exchange exchangesECN vs exchange

Both Conduct transactionsCollect feesProduce and sell market data

ExchangesCan list stocksGovern themselves…

ECNsGoverned by the SEC

Specialist Book

Price # of shares

Asked $ 19.40 20,000

$ 19.30 10,000

$ 19.27 700

$ 19.23 11,000

$ 19.22 900

Asked $ 19.20 500

Bid $ 18.70 200

$ 18.68 300

$ 18.67 700

$ 18.66 1100

$ 18.65 10000

$ 18.60 14000

NYSE vs ECNsNYSE

Broker sends buy order to specialist Specialist finds sellers

ECNs broker sends buy order to ECN Computer matches orders No specialists

SEC charges 2005 Interpositioning – extra broker/dealerTrading ahead – own account

Lucky

Automated limit order books Open display Offer anonymity After-hours trading Subject to SEC’s Regulations

Order protection rule – best displayed pricesAccess rule – fair access, limit on feesSub-penny rule

• Instinet (1st)• Archipelago• Island• BATS • Direct Edge• LavaFlow• Bloomberg• Track Data

1st

• Started in 1969 (before Nasdaq) Subscribers

Institutional investors Broker-dealers Market-makers

• Initially a broker-dealer Operated electronically

• New category ECN In 1997 And imposed order handling rules Why?

Display RuleDisplay order if better than specialist’s or

market maker’s

Quote RuleECN amendmentMake publicly available any superior prices

After 1997 the number increasedBecame a real competitor for NasdaqArchipelago, Brut, Island, Instinet

Archipelago1997Both institutional and retail

IslandMostly retailAcquired by Instinet in 2002

Early 2000 Instinet by NASDAQ Archipelago by NYSE

Restricted ECNs

RescindedSEC pressure1999Has since lost market share to ECNs

ECNs has advantages over the traditional trading systemsLess expensive trade executionFaster trade executionMore complete price informationAnonymityHours

(n.d.). Retrieved April 6, 2011, from Investopedia: http://www.investopedia.com/terms/t/tradingahead.asp

(2005, 11 4). Retrieved April 6, 2011, from SEC: http://www.sec.gov/divisions/marketreg/mrecn.shtml

Engber, D. (2005, April 21). Markets vs Exchanges. Retrieved 4 06, 2011, from Slate: http://www.slate.com/id/2117171/

Fabozzi, F. J., Modigliani, F., & Jones, F. J. (2010). Foundations of Financial Markets and Institutions. Pearson Education Inc.

Samii, M., & Karush, G. (2004). International Business and Information Technology. New York: Routledge.

Understanding ECNs and Inside Spreads. (n.d.). Retrieved April 16, 2011, from UC San Diego Economics: http://econ.ucsd.edu/~mwilloug/documents/Articles%20and%20Reports/NASDAQ%20inside%20spreads.pdf