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Spear Leeds Kellogg Lp - PowerPoint

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					Electronic Communications
         Networks
          Marcus Woo
          Kevin Appel
Activity
   Stock X   Person 1 represents a brokerage and has control over
              1,000 shares and have access to market information
   Stock Y
              Person 2, 3, and 4 are private investors who have 100
   Stock Z   shares to invest and only know that all 3 stocks have
              been performing stably.

              Assume that all stocks have the same share prices.
What is an Electronic Communications Network
(ECN)?
   Alternative Trading System

   Privately Owned

   Subscription Service

   Establishes anonymous and direct connection between buyers and sellers

   Accounts for 65% of trading volume of NASDAQ-listed shares as of 2005
History of ECNs
   Technological changes

   Securities industry quick to adapt (SuperDOT)

   Instinet recognized as first electronic exchange market – 1998

   Skeptical about lack of human interaction
Name          Founded   Location/Owner
Island        1996      Subsequently purchased by Instinet
Instinet      1969      Numera Holdings, Inc.
Archipelago   1997      NYSE
Brut          1998      NASDAQ
Redibook      1998      Spear, Leeds, & Kellogg
Bloomberg     1997      Bloomberg, LP
Trading on ECNs
   Essentially a limit order book

   Eliminates middleman

   ECN listed as contra-side party

   Smaller profit spreads (Buyer/Seller)

   ECN acts as 3rd party guarantor
Benefits of Trading on an ECN
   Anonymity

   Lower transaction costs/errors

   Competitive pricing (transparency)

   Extended hours of operation

   Efficient transaction times

   Ability to pursue market makers
Advantages of NYSE
   Preference ability and internalization

   More suitable for large stock orders

   Price improvement via the auction process

   No subscription fee for retail investors
Regulations
   ECN serves a limited regulatory function

   Assume default risk

   NYSE Rule 390

   Heavily criticized and repealed on May 8, 2000
Going public
   $1 billion class action lawsuit against market makers

   Maintaining high stock prices on open market

   Trading with each other at lower prices on Instinet

   Result: ECNs open to the public
Electronic Communications Networks Today
•Goldman     Sachs    •Salomon    Smith Barney
•Merrill   Lynch      •PaineWebber

•Morgan     Stanley   •Credit   Suisse First Boston
•J.P.   Morgan        •Lehman    Brothers

•Bear    Stearns
Electronic Communications Networks Today
   Expand markets in which they hold investments

   Reduce volume of transactions flowing through specialist

   Cuts costs

   Involvement allows small-time investors access to ECNs
Questions?

				
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