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June 4, 2007

ISE's Message to ECNs: Quote Here

By Nina Mehta

The International Securities Exchange's equities market, ISE Stock Exchange, will soon invite ECNs to quote on its order book. The exchange plans to roll out an order-delivery functionality for ECNs comparable to what exists on the National Stock Exchange.

"It's an additional source of liquidity for the exchange," said Andrew Brenner, head of the ISE Stock Exchange. "We're continuing to add functionality to the platform and this is one more piece of it." The average daily volume on the ISE's equities market is 6 million to 7 million shares.

BATS and LavaFlow ECN both say they would consider quoting to the ISE. ECNs requiring order delivery currently quote to the NSX, the only exchange providing that service. Those ECNs formerly quoted on Nasdaq, but Nasdaq eliminated that service when it became an exchange last year. Industry execs say Nasdaq did so because it saw ECNs as competitors for its order flow.

"The NSX saw an opportunity and created an interesting model," said Jaime Selway, founder and managing director at institutional broker White Cap Trading. "They created an order-delivery model to accommodate other ECNs within their own order book as a way to get liquidity. They had success and now are being copied."

Order delivery first emerged as a way for Nasdaq to deliver orders to market makers, Selway noted, but is now a mechanism for exchanges to build liquidity while accommodating competitors.

The ISE was approached about providing order delivery for ECNs even before ISE Stock Exchange launched, according to Brenner. "So this has been a thought for us for some time," he said.

Order delivery enables an ECN to represent its orders in an SRO's public book, as well as on its own book, without the risk of dual executions. An exchange offering order delivery must have fast, powerful technology because of the quick turnaround time required to ensure that an ECN's order in the exchange's book is available for execution. The ISE applied to the SEC to allow order delivery in May. Market participants expect the proposal to be approved.