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June 30, 2000

ECN Blitzkreig On Listed Stocks

By Peter Chapman

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  • ECN Blitzkreig On Listed Stocks

Electronic communica tion networks are staking their claims to a piece of the listed market as regulatory and technological barriers are swept away.

Six of the nine active ECNs are positioning themselves to match limit orders for listed securities as they do for Nasdaq issues.

"A significant amount of listed trading will migrate to electronic platforms," said Greg Smith, an analyst at Chase H&Q. "Many of the most liquid names will move very easily."

Smith says success for the ECNs is dependent on two factors: membership in or access to the National Market System and a steady stream of orders.

Three ECNs-BRUT, Bloomberg Tradebook and MarketXT-gained access to the NMS when they joined Nasdaq's third market last month, the newly-named InterMarket. That was made possible by Securities and Exchange Commission approval of a Nasdaq rule change and modifications to the third market's interdealer trading system.

Three others - Archipelago, Island and Nextrade - are angling to become stock exchanges. Archipelago has signed an agreement to merge with the equities division of the Pacific Stock Exchange. SEC approval means Archipelago will gain both membership in the NMS and an existing source of trades.

Island, the second largest ECN after Instinet, applied to the SEC a year ago for exchange status. It is getting impatient. In April, Island put pressure on the SEC by calling for it to mandate the inclusion of ECN quotes in the Consolidated Quotation System. The CQS, essentially one half of the NMS, broadcasts the quotes of the seven stock exchanges and third market dealers to traders everywhere.

Access to the CQS is the ultimate prize for ECNs. Island wants visibility for its customers' orders and the ability to drive listed quotes. Without that exposure those limit orders could languish, unseen by the broader marketplace on an ECN's book.

Island's proposal is apparently being taken seriously by Washington. In May, hearings were held by the Subcommittee on Finance and Hazardous Waste of the House Committee on Commerce.

The issue is whether non-self regulatory organizations such as alternative trading systems should have the benefit of the CQS without holding any oversight responsibilities. Testifying were executives from the National Association of Securities Dealers and the New York Stock Exchange among others.

Tradebook President Kim Bang does not see the SEC granting Island's request anytime soon. Tradebook has decided to work with the SROs and not against them.

"We prefer to see the SROs and exchanges compete for our business," Bang said. "We want them to treat us as a client. We are a consumer of exchange and SRO services."

As members of the third market, Tradebook, BRUT and MarketXT gain immediate access to both halves of the NMS-the CQS and the Intermarket Trading System (ITS).

The ITS is the order routing mechanism used by exchange specialists and third market dealers, such as Bernard L. Madoff Investment Securities and Knight Trading Group's Knight Capital Markets.

ITS Concerns