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February 1, 2001

A Perfect ECN Match?

By Peter Chapman

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Richard Kelly is the creator and chief executive of New York-based start up WOFEX. The firm operates the WOFEX (for World Financial Exchange) trading system. The system marries an electronic communication network with a crossing system. Orders post on the ECN, entering the cross periodically. An ECN is an open order matching system that runs continuously all day and is typically used for small trades. A crossing system is a closed order matching system that runs at set times throughout the day and typically matches the larger blocks of stock.

Kelly's preparation for the 18-month-old venture includes three years as a director with Anderson Consulting, where he advised broker dealers on electronic trading, and three years as a strategic planner at Instinet. His Instinet accomplishments include the plans for an expansion into the retail business and a fixed-income trading platform.

WOFEX won't be the first attempt to link an ECN to a crossing network. In May 1999, Bloomberg announced it would link its TradeBook ECN to ITG's POSIT crossing network, creating a SuperECN.' That deal is still in the implementation phase, according to Bloomberg.

Traders: Are you an ECN or an alternative trading system?

Kelly: We are an ATS, but the ECN component of the system has been approved as an ECN by the Securities and Exchange Commission.

Traders: Why do traders need a system like WOFEX?

Kelly: Traders want to be able to move orders seamlessly between the continuous market and a crossing mechanism. Traders today move between the Instinet ECN and the POSIT cross, but it's labor-intensive and time-consuming. Also, you must arrive at the POSIT cross early and then wait five minutes afterwards for a report. The process is especially hard on traders with many stocks to monitor. By integrating the two platforms under one roof we make transfers instantaneous. Even under the TradeBook/ POSIT arrangement it takes time for an order to move between the two systems. We have actually filed a patent on the technology that transfers the orders between the systems.

Traders: At what price do crosses occur?

Kelly: The cross in a particular stock goes off at one of 300 randomly chosen seconds within a five-minute window. The price is the midpoint of the NBBO associated with that second.

Traders: How many crosses will you run every day?

Kelly: Six.

Traders: ECNs are used mostly for small orders; crosses for larger ones. Also, ECNs take limit orders but your cross accepts only open orders. Won't there be some conflict in using the two sides of WOFEX?

Kelly: Customers will have two choices. They can participate in just the cross or both the continuous and the cross. To be represented in both they must indicate the price and the amount they want to display in the continuous. The balance will sit in the (hidden) reserve. The limit price they post in the continuous will obviously not be effective in the cross. There they must agree to accept the midpoint of the chosen NBBO. For example, assume a customer wants to buy 50,000 shares of a stock at $50. He might display 1,000 at $50 in the continuous and hold 49,000 in reserve. If he has not executed by the time the next cross begins, 50,000 shares would enter the cross.

Traders: When will you launch?