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November 1, 1998

Bank Analyst Predicts Bright Future For ECNs

By Staff Reports

A bright future is predicted for electronic communications networks (ECNs) in a report published by BancBoston Robertson Stephens. The report forecasts that the volume of Nasdaq business transacted on ECNs will double within five years, from slightly more than the current 20 percent today.

"ECNs are essentially a new mechanism that adds liquidity to a market and helps take away some of the market-impact cost," states the report, authored by BancBoston Robertson Stephen's Gary R. Craft.

"Since liquidity and market impact are the two biggest costs of trading, ECNs are being viewed by most exchanges as a necessary part of market progress," Craft said in the report.

Craft contends that ECNs will play an increasingly important role as U.S. stock exchanges begin experimenting with alternative sources of liquidity. The merger of the National Association of Securities Dealers with the American Stock Exchange is cited as an example.

"Such a merger would combine different trading foundations and physical dimensions," he noted. "This type of combination signals the willingness of separate habitats to merge together and fortify their futures."

Craft's report mostly focuses on ECNs as defined in the order handling rules, though his definition does include other trading mechanisms.