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December 1, 1999

Cover Story: The ECN Strategy

By John A. Byrne

The ECN strategy at Charles Schwab Capital Markets & Trading Group unfolded over a chance meeting. Lon Gorman met with a senior executive who overseas the REDIbook electronic communications network. Gorman said it "warmed the cockles of his heart" when he heard this executive confirm his own view on ECNs: They have no notional, or face value.

"I invited him to make a presentation [at Schwab]," said Gorman, the head of the capital markets and trading unit of the San Francisco-based brokerage giant."Our main motivation was to reduce our outrageous Instinet bills. The second motivation was [to have a system] for after-hours trading."

Gorman was persuaded to partner with REDIbook and others, including Spear, Leeds & Kellogg, (which operates REDIBook), and Donaldson, Lufkin & Jenrette

Gorman says that up to 70 percent of the online active accounts and up to 57 percent of the online volume will eventually be represented in REDIBook. "This is Godzilla here," Gorman said. Still, there is no guarantee that REDIbook, with the backing of new partners, will automatically take substantial volume away from other ECNs, some traders note.