How ECNs Changed Nasdaq Trades
Though most have been around for less than two years, electronic communication networks, or ECNs, already have dramatically changed the way Nasdaq stocks are traded.
ECNs offer a cheaper, and often faster, way to execute trades that lets investors circumvent traditional brokers.
Thus far, ECNs’ primary advantage to investors has been in helping to trim the “bid-ask spread” on Nasdaq stocks. That’s the difference between the lower price at which a brokerage will buy a stock from an investor and the higher price at which it will sell it.
By giving investors--so far, mostly institutions--the chance to trade directly with one another, ECNs have forced brokerages to better their prices for all investors, to stay competitive.
ECNs have gobbled up a noticeable chunk of Nasdaq trading volume, accounting for 16% of all such trades through the third quarter, up from 12% in the fourth quarter of 1997, according to ITG Inc. in New York.
For years, the only ECN was Instinet, a now-20-year-old system known largely for enabling big institutions such as mutual funds to trade stocks after regular market hours. In the fourth quarter of 1997, Instinet commanded 90% of all ECN volume, ITG says.
But the fastest-growing ECN today is Island, which is run by Iselin, N.J.-based Datek Online Holdings Corp. Island caters largely to individuals, particularly aggressive small investors known as day traders.
By the third quarter of this year, Instinet’s ECN market share was down to 73% while Island had surged to 18% from 6% nine months earlier, according to ITG.
Not surprisingly, Island has a major presence in trading of Internet and other volatile tech stocks favored by day traders.
Seeking to capitalize on the popularity of Island, Datek plans to apply to the Securities and Exchange Commission for permission to become a full-fledged stock exchange. That would allow Island to trade New York Stock Exchange stocks.
Datek is rumored to be working on a deal in which E-Trade Group would invest in Island.
