electronic communication networks
DESCRIPTION
Electronic Communication Networks. Marie Carone. Definitions. Broker-dealers Exchange Limit order Limit order books Institutional investors Market-makers OTC trading. What are ECNs?. Off-exchange exchanges ECN vs exchange Both Conduct transactions Collect fees - PowerPoint PPT PresentationTRANSCRIPT
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Marie Carone
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Broker-dealers Exchange Limit order Limit order books Institutional investors Market-makers OTC trading
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Off-exchange exchangesECN vs exchange
Both Conduct transactionsCollect feesProduce and sell market data
ExchangesCan list stocksGovern themselves…
ECNsGoverned by the SEC
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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
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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
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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
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• Instinet (1st)• Archipelago• Island• BATS • Direct Edge• LavaFlow• Bloomberg• Track Data
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1st
• Started in 1969 (before Nasdaq) Subscribers
Institutional investors Broker-dealers Market-makers
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• Initially a broker-dealer Operated electronically
• New category ECN In 1997 And imposed order handling rules Why?
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Display RuleDisplay order if better than specialist’s or
market maker’s
Quote RuleECN amendmentMake publicly available any superior prices
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After 1997 the number increasedBecame a real competitor for NasdaqArchipelago, Brut, Island, Instinet
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Archipelago1997Both institutional and retail
IslandMostly retailAcquired by Instinet in 2002
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Early 2000 Instinet by NASDAQ Archipelago by NYSE
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Restricted ECNs
RescindedSEC pressure1999Has since lost market share to ECNs
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ECNs has advantages over the traditional trading systemsLess expensive trade executionFaster trade executionMore complete price informationAnonymityHours
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(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