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August 23, 2005

Study Narrows Spread between ECNs & Market Makers

By Gregory Bresiger

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(Traders Magazine, August 2005) -- Everything you assumed about ECNs could be wrong. Using factors such as price improvement, speed and fill rates, market makers and NYSE specialists can hold their own with ECNs, according to a veteran market observer. Octavio Marenzi, CEO of Celent, said that he has found that specialists have "surprisingly good" performance. He also argued that ECNs had low fill rates and execution times often were very slow.

Market makers and specialists quickly backed Marenzi's comments, which were contained in a study entitled, "Execution Quality in the US Equities Markets." Marenzi arrived at his controversial conclusions after a three-month study that examined market and marketable limit orders "ECNs have neither speed nor certainty of execution," said David Humphreville, President of the Specialist Association, whose group represents NYSE specialists. "We have been saying these kinds of things for years."

Market makers are also arguing that they are more effective at executions because ECNs don't match orders, are unable to provide capital commitments and sometimes must turn to specialists to complete orders. Therefore, ECN orders often lag on their books and have inferior executions, they said.

Humphreville added that, because specialists match orders, "We create trades that would not otherwise occur. We can do everything the ECNs do, but we can also find the other side of a trade."

Marenzi surveyed a total of some 240-market participants. They executed about 3 billion trades in 7,000 NYSE and Nasdaq stocks. He found that NYSE specialists often beat their electronic communications network competitors in the quality of executions and that electronic trading is sometimes slow.

"No market center is close to being consistently the best."

Octavio Marenzi, Celent