electronic communications networks marcus woo kevin appel
TRANSCRIPT
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Electronic Communications Networks
Marcus WooKevin Appel
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Activity Stock X
Stock Y
Stock Z
Person 1 represents a brokerage and has control over 1,000 shares and have access to market information
Person 2, 3, and 4 are private investors who have 100 shares to invest and only know that all 3 stocks have been performing stably.
Assume that all stocks have the same share prices.
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What is an Electronic Communications Network (ECN)? Alternative Trading System
Privately Owned
Subscription Service
Establishes anonymous and direct connection between buyers and sellers
Accounts for 65% of trading volume of NASDAQ-listed shares as of 2005
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History of ECNsTechnological changes
Securities industry quick to adapt (SuperDOT)
Instinet recognized as first electronic exchange market – 1998
Skeptical about lack of human interaction
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Name Founded Location/Owner
Island 1996 Subsequently purchased by Instinet
Instinet 1969 Numera Holdings, Inc.
Archipelago 1997 NYSE
Brut 1998 NASDAQ
Redibook 1998 Spear, Leeds, & Kellogg
Bloomberg 1997 Bloomberg, LP
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Trading on ECNsEssentially a limit order book
Eliminates middleman
ECN listed as contra-side party
Smaller profit spreads (Buyer/Seller)
ECN acts as 3rd party guarantor
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Benefits of Trading on an ECN Anonymity
Lower transaction costs/errors
Competitive pricing (transparency)
Extended hours of operation
Efficient transaction times
Ability to pursue market makers
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Advantages of NYSEPreference ability and internalization
More suitable for large stock orders
Price improvement via the auction process
No subscription fee for retail investors
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RegulationsECN serves a limited regulatory function
Assume default risk
NYSE Rule 390
Heavily criticized and repealed on May 8, 2000
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Going public$1 billion class action lawsuit against market makers
Maintaining high stock prices on open market
Trading with each other at lower prices on Instinet
Result: ECNs open to the public
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Electronic Communications Networks Today
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Electronic Communications Networks TodayExpand markets in which they hold investments
Reduce volume of transactions flowing through specialist
Cuts costs
Involvement allows small-time investors access to ECNs
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Questions?