mis 3090 it for financial services

MIS 3090IT for Financial Services

Alternative Trading Systems (ATS)and

Electronic Communications Networks (ECN)

2/16April 21, 2023

Definition Definition An Alternative Trading System (ATS) is a networked

application that connects potential buyers and sellers of securities electronically, and matches trades that meet predefined criteria.

An Electronic Communications Network (ECN) is an ATS that has been registered with the SEC as either a broker/dealer or an exchange.

– Broker/dealer = www.island.com (integrated into NASDAQ)

– Exchange = www.archipelago.com (Arca|Ex)

Class Question: What’s the added benefit of registering as an exchange?

3/16April 21, 2023

Examples of ECNsExamples of ECNs

Class Question: Consolidation is taking place (why do you think this is?)

4/16April 21, 2023

Vol. distribution - NYSE listed stocks

Source: Goldman Sachs Trading & Market Structure Analysis

Other exchanges

3%

Nasdaq InterMarket

15%

NYSE77%

ARCA1%

Chicago4%

2%

1%

12%

0%

Broker-dealers Posit Other ECNsand ATSs

Seeing through Nasdaq InterMarket

Single-counted, share volume

Internal matches only All hours Excluding ETFs

October 2003

Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University

5/16April 21, 2023

Vol. distribution – Nasdaq stocks

Distribution by Execution Venue

Nasdaq SM17%

ARCA25%

Liquidnet0.1%

Instinet & Island23%

Posit0.5%

Chicago1%

Other33.4%

October 2003

Share volume Single-counted Internal matches only All hours Excluding ETFs

Mostly broker-dealer upstairs trades

But also small activity on:

• Brut

• NexTrade

• MarketXT

• Attain

• TradeBook

• Other ATSs

2 to 5 percent?

Source: Goldman Sachs, Trading & Market Structure Analysis

Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University

6/16April 21, 2023 Click here to play Video

7/16April 21, 2023

Trade through Rule (TTR)Trade through Rule (TTR) Instituted in 1975, the TTR was designed to make sure investors got the

best available price for their stock trade. The TTR means that if you place an order and the best quote is with a

specialist on the floor of the NYSE, then your broker is required to route your order there

Applies only to NYSE stocks since a MM would match the best price on a NASDAQ stock without having to route the order to that MM offering the best price

While a quote on a NASDAQ stock is executable, a quote on an NYSE stock is an indication and not a firm quote.

Specialists are allowed to hold an order for 30 seconds before either executing it or handing it off to another specialist—and during that time, the price may change.

NASDAQ members charge NYSE specialists with bait-and-switch pricing tactics so that orders are routed to the NYSE, then executed at a worse price than was available at the time the order was entered.

Based on article by Theresa Carey in eWeek 7-28-04

8/16April 21, 2023

Clearing MechanismsClearing Mechanisms After a trade takes place (i.e., becomes locked-in), then what? There must be an exchange of cash for securities Third parties offer clearing/settlement services Possibility of self-clearing (e.g., Raymond James)

Why is this a potential benefit?

Fee for service charged back to broker Trades clear in 3 days (T+3) Stock borrowing in the interimhttp://www.nscc.com

Exch.

Clearing

Buyer Seller

SecuritiesFunds

SecuritiesFunds

9/16April 21, 2023

When the financial markets close, SIAC’s computers keep going, processing, on behalf of the Depository Trust & Clearing Corporation (DTCC) and its affiliates, nearly 100 percent of the equities and fixed income securities traded in the U.S. each day.

SIAC’s Shared Data Center alone is linked to the securities industry by more than a thousand communication lines over which an average of 70 billion bytes of data are transmitted daily.

SIAC plans, develops, implements and manages a variety of automated information-handling and communications systems. These systems support order processing, trading, market data reporting, trade comparison, surveillance, clearance and settlement for a broad range of securities.

SIAC SIAC (subsidiary of NYSE)(subsidiary of NYSE)

10/16April 21, 2023

Secure Financial Transaction Infrastructure SIAC's Secure Financial Transaction Infrastructures is a high capacity

infrastructure that improves the overall resilience of the financial industry's data communications connectivity. This highly reliable infrastructure offers firms access to the trading, clearing and settlement, market data distribution and other services SIAC provides on behalf of most of the U.S. securities industry's exchanges and utilities.

SFTI is a national solution that all members of the financial community can utilize. SFTI currently offers local connectivity to firms in the Northeast, Midwest and New England, with plans to expand to other areas of the country as the market demands.

Actively expanding in Europe, Asia, Middle East to be global backbone for securities industry

http://www.nysetransacttools.com/sfti/

11/16April 21, 2023

Stock BorrowingStock Borrowing The Continuous Net Settlement (CNS) System is an automated

book-entry accounting system that centralizes the settlement of compared security transactions and maintains an orderly flow of security and money balances.

The Stock Borrow Program allows participants to lend NSCC (National Securities Clearing Corp.) available stocks and fixed income securities from their account at The Depository Trust Co., to cover temporary shortfalls in the CNS System. NSCC credits members' accounts with the full market value of securities borrowed, and members can earn overnight interest on that value by investing the funds.

Class Question: What are some risks associated with this program?

12/16April 21, 2023

Block TradingBlock Trading The “Napster” of Trading Strictly sold to the buy-side – suitable for large blocks Launched in 4-2001 with 38 members

– currently has 273 members with $6.66 trillion in equity assets Average trade size is 47,000 shares Traded $11.5 billion of NYSE equities in first year Quantity discovery, not price discovery

– facilitates negotiation of price

Check out Liquidnet: news and stats

13/16April 21, 2023

ETFs, VIPERS & SPDRsETFs, VIPERS & SPDRs

Different from Mutual Funds (buy/sell at NAV)

Trade directly on exchanges during the day Lower expense ratios than with most mutual funds Tax implications Barclay’s iShares traded on AMEX VIPERS are Vanguards ETF, similar to iShares SPDR – benchmark S&P 500, 9 sector SPDRs QQQ – Nasdaq 100

14/16April 21, 2023

http://www.spdrindex.com/

15/16April 21, 2023

For Next Class… For Next Class… Read

– Check out www.liquidnet.com for next class– Slides on Optimark– Assigned readings on schedule page