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January 1, 1999

Datek's Island: New Competition For Big Board Specialists?

By J.L.W. with staff reports

The Securities and Exchange Commission's new rules for the regulation of alternative trading systems (ATSs) stirred a swift move by Datek Online Holdings, the upstart Internet discount-brokerage outfit.

The firm, which is run as a broker dealer, said it is seeking permission from the SEC to turn Datek's Island electronic communications network into a self-regulated stock exchange.

Stock-exchange status would potentially open up a new revenue stream for Island, allowing it to electronically match buyers and sellers of New York Stock Exchange-listed securities.

Island, which currently takes stock orders for mostly retail business from other broker dealers, is popular with online investors. New York-based Datek said it processes up to 100 million shares of Nasdaq stocks daily.

Switching to stock-exchange status could present the NYSE with the same style of predatory electronic day-trading that has been the bane of Nasdaq market makers during this decade. One expert said it could pit Big Board specialists against listed day traders and potentially create the same levels of volatility on some issues as witnessed recently on Nasdaq.

The SEC notes that the low cost of technology has enabled the establishment of markets that compete directly with the more traditional exchanges. The agency added that though these ATSs are markets, they are regulated as broker dealers. The new rules are designed to close the regulatory gaps, reflecting the reality that ATSs, which include Reuters Holdings' Instinet, are, in-effect, flourishing stock exchanges.