ELECTRONIC COMMUNICATIONS NETWORKS (ECNs) as they are popularly known are well-established trading platforms in the United States (USA). A New York Times article reports that electronic trading is one in four transactions made by individual investors in USA. The goal of ECN's is to cut out intermediaries between buyers and sellers in stock transactions. "Today, ECNs account for approximately 30% of total share volume and 40% of the dollar volume traded in Nasdaq securities. ECNs account for approximately 3% of total share and dollar volume in listed securities.4 In contrast, in 1993, ECNs accounted for only 13% of share volume in Nasdaq securities and only 1.4% of listed share volume." (SEC Report, 2005, op. cit. 1.)
Instinet, a Reuter subsidiary and a network established in 1969 to allow mutual funds and other institutional investors to post orders anonymously at prices inside the wide spreads remains the biggest ECN. It trades in more than 40 stock markets including the NYSE.
Most ECNs like Instinet are for institutional customers only. However, The Island and Archipelago, owned by Datek Holdings, an online trading firm accept trades from small investors. The Archipelago system allows an order to leave the network once it is determined that nobody is willing to take the opposite position and get posted onto the NASDAQ marketplace. The one bottleneck that hinders efficient performance of ECNs is volume. Given volatility of NASDAQ scrips it is important that an ECN quickly match orders lest the market move away from the requested price.
"The information technology revolution has provided investors with new execution choices. Of special note are the recent growth of alternative trading systems known as Electronic Communications Networks ("ECNs") and the increased opportunities for trading in the after-hours market" (SEC report, 2005, op. cit. 1.). ECNs emerged following a change in...