Electronic Communications NetworksActivityWhat is an Electronic Communications Network (ECN)?History of ECNsSlide 5Slide 6Trading on ECNsBenefits of Trading on an ECNAdvantages of NYSERegulationsGoing publicElectronic Communications Networks TodaySlide 13Questions?Electronic Communications NetworksMarcus WooKevin AppelActivityStock XStock YStock ZPerson 1 represents a brokerage and has control over 1,000 shares and have access to market informationPerson 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.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 2005History of ECNsTechnological changesSecurities industry quick to adapt (SuperDOT)Instinet recognized as first electronic exchange market – 1998Skeptical about lack of human interactionName Founded Location/Owne rIsland 1996 Subsequently purchased by InstinetInstinet 1969 Numera Holdings, Inc.Archipelago 1997 NYSEBrut 1998 NASDAQRedibook 1998 Spear, Leeds, & KelloggBloomberg 1997 Bloomberg, LPTrading on ECNsEssentially a limit order bookEliminates middlemanECN listed as contra-side partySmaller profit spreads (Buyer/Seller)ECN acts as 3rd party guarantorBenefits of Trading on an ECNAnonymityLower transaction costs/errorsCompetitive pricing (transparency)Extended hours of operationEfficient transaction timesAbility to pursue market makersAdvantages of NYSEPreference ability and internalizationMore suitable for large stock ordersPrice improvement via the auction processNo subscription fee for retail investorsRegulationsECN serves a limited regulatory functionAssume default riskNYSE Rule 390Heavily criticized and repealed on May 8, 2000Going public$1 billion class action lawsuit against market makersMaintaining high stock prices on open marketTrading with each other at lower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 publicElectronic Communications Networks TodayElectronic Communications Networks TodayExpand markets in which they hold investmentsReduce volume of transactions flowing through specialistCuts costsInvolvement allows small-time investors access to