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May 31, 1998

A Price War Planned By New STRIKE ECN Bear Stearns' ECN is Taking Aim at Rival Systems

By Om Malik with staff reports

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  • A Price War Planned By New STRIKE ECN Bear Stearns' ECN is Taking Aim at Rival Systems

As STRIKE, the name on the hottest new electronic communications network (ECN) simply suggests, Bear, Stearns & Co. is planning for war a price war.

STRIKE, the ECN sponsored by Bear Stearns, is going live this summer backed by some of the New York-based firm's Wall Street peers. And millions of dollars and potential profitability are at stake.

Arthur Pachecho, Bear Stearns' co-head of Nasdaq trading, and president and chief executive of the firm's affiliated STRIKE unit, said the new ECN is being marketed as an attractive alternative to Instinet and other ECNs.

Commissions

STRIKE's best weapon may be its commission schedule. Pachecho said STRIKE will charge customers "substantially" lower commissions for executions than its competition, but declined to elaborate.

Instinet, owned by London-based Reuters Group PLC, is the largest ECN approved by the Securities and Exchange Commission under terms of the order handling rules, and accounts for an estimated 20 percent of the average daily volume on Nasdaq, or more than 100 million shares.

Instinet's average commission charges are lower on heavy volume and generally amount to pennies or less on each share per trade executed.

STRIKE, which was approved by the SEC last January, thinks it will soon keep pace with Instinet's volume, thanks to a potential pool of lucrative order flow, including a network of more than 400 fully-disclosed Bear Stearns correspondent brokers that clear and execute business through the firm.

Bear Stearns' transaction volume is comparable to Instinet's, roughly 140,000 equity trades daily and about 12 percent of the business on the New York Stock Exchange.

Moreover, STRIKE is counting on order flow from some of the 15 equity participants and partners in the venture, including Wall Street giants Herzog, Heine, Geduld, Salomon Smith Barney, Donaldson, Lufkin & Jenrette, NationsBanc Montgomery Securities and Cantor Fitzgerald. (Sun Microsystems and NeoVision are also partners.)

"The nature of the owners means we can achieve significant critical mass," said Pachecho, the soft-spoken 34-year veteran who will vacate his seat on the desk this summer to concentrate fully on STRIKE.

In addition, STRIKE will be available through more than 60,000 Bridge terminals, a move that gives the soon-to-be-launched ECN a widespread reach.

Plans Hatched

Plans for STRIKE were first hatched in the wake of the order handling rules that made Nasdaq price-quote information more transparent.

Now a customer sending a better price on a stock to a market maker is assured that an order will be publicly exposed or executed by the market maker.

The market maker must either fill the customer's order, change its own quote to reflect the customer's superior bid or asked price, or transmit the customer's order to an ECN.

Bear Stearns' STRIKE plan was motivated by that ECN display option, and a calculation that it is more cost-effective to use its own ECN rather than a competitor's, which then collects the agency commission. An average-sized Nasdaq desk may pay Instinet and other ECNs several million dollars annually in commissions.

"There have been significant changes in the regulatory environment. Many changes are beneficial to the investors, of course, but at the same time, market making is much more expensive," Pacheco said.