SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 1 The impact of Electronic Communications Networks...
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Transcript of SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 1 The impact of Electronic Communications Networks...
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 1
The impact of The impact of Electronic Communications Electronic Communications
Networks (ECNs)Networks (ECNs) on NYSE on NYSE
Presentation to
Mr. Richard Grasso and NYSE Directors
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 2
Agenda
• ECNs – What they are / History and growth
• Strengths and Challenges
• Threats to NYSE
• Takeaways
• Questions
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 3
History and Growth
1969
Instinet, the first ECN,
was created
Increased technology allows
for greater capacity and
efficiency
19901970 1996
SEC Order Handling
Rules triggers growth
# ECNs
2001
1
9
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 4
ECNs have 30% of trading volume in Nasdaq
Trading Volume in Nasdaq
10%14%
36%28%
12%
Island
REDIbook
OthersECNs30%
Source: CSFB report
70%
Instinet
Archipelago
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 5
ECNs - What they are
• Bring buyers and sellers together for electronic execution of trades.
• Have a wide variety of subscribers, including retail investors, institutional investors, market makers and broker-dealers.
• Allows subscribers to trade between themselves without having to go through a middleman
• Are alternative to formal Stock Exchanges (NYSE) or to dealer makers (NASDAQ) for trading securities
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 6
How NYSE and ECN Transactions Differ
Investor Brokerage firm A Specialist
IT System
Own Inventory
Brokerage firm B
ECN
Investor ECN
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 7
Limited orders
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 8
Strengths of ECNs
• Anonymity (Signaling)
Information leakage is greatly reduced
• Commission Structure Reduced from $.06 to $.03 per share
• More efficient (Speed)
Orders post instantly versus wait up to three minutes
• Neutrality
Removes conflicts of interest in trading for own accounts
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 9
Strengths of ECNs (cont.)
• Transparency
ECNs post size and price of customer orders
• After hours trading
ECNs offer an attractive venue for trading outside normal trading hours
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 10
The Challenges Facing ECNs
• Liquidity
How to retain and attract volume
The greater the volume of transactions, the more likely trades will be executed successfully
Routing trades to other ECNs
Partnering with brokerage firms for order flow
• Differentiation
An exchange that provides superior transaction processing
Or a value-added broker that offers a range of products
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 11
The Challenges Facing ECNs (cont.)
• Increased Regulatory and Compliance Demands Regulation ATS (Alternative Trading Systems) SEC Broker Dealer Regulations Exchange Specific Regulations
• Integrity Building an ethical reputation Excelling in treatment of customers
• Technology Continual upgrade requires substantial investments
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 12
Why ECNs have had limited impact on NYSE
• Reluctance of traders to change trading places
• Better economies of scale through larger volumes per orders
• Better liquidity
• Automation of trading posts
• NYSE Direct + (limited orders
smaller than 1,099 shares)
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 13
• ECNs are merging to obtain benefits of network effects
• If they are able to differentiate they can obtain
Market share
Profits inequality
Threats to NYSE
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 14
The power of automation
Cost Reduction
Trading Cost of capital
27 % 4.2 %
Source: The Economist
Threats to NYSE
• Full automation of NYSE would cut trading costs and reduce cost of capital to firms
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 15
• Exchanges around the world are merging
• Achieve economies of scale
• Get order flow to increase liquidity
• Reduce fragmentation
• Improve automation
• Eg.
London Stock Exchange + Deustche Börse = iX
iX has signed a JV with Nasdaq
Threats to NYSE
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 16
• Archipelago has obtained approval to become first ECN-based national stock exchange
• Participants can trade NYSE, AMEX listed stocks, as well as Nasdaq shares
• Archipelago can connect with other exchanges through the Intermarket Trading System and collect fees for data access
Threats to NYSE
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 17
Takeaways
• ECNs have consistently increased volume share
• ECNs have made inroads into the Nasdaq and into the European market
• ECNs are changing the way that security markets conduct business
• NYSE has remained the dominant player but will need to address its own capabilities to remain the market leader
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 18
Questions?
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 19
Supporting material
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 20
Market capitalization has increased at the NYSE…
0
2
4
6
8
10
12
14
1990 1992 1994 1996 1998 2000
Market Capitalization
($trillion)
# companies listed = 1,769
# companies listed = 2,800
Source: The Economist
NYSE business
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 21
… and so has the American passion for equities
30
48
0
10
20
30
40
50
60
1991 2000
% of adult population that owns shares
%
NYSE business
Source: The Economist
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 22
The automation of trading posts in 1999 has brought substantial benefits to the NYSE … Increased volume
Additional sources of market information for specialists and brokers
Better visibility to institutions and investors
Enhanced liquidity
NYSE business
… however, ECNs can present a threat to NYSE
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 23
How ECNs operate with Nasdaq
NasdaqSelectNet
ECN
Subscriber
Subscriber
Subscriber
Non Subscriber
Non Subscriber
Non Subscriber
Non SubscriberNon Subscribers access ECNs via SelectNet
Who are the ECNs and which services they provide
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 24
In 1986 London Stock Exchange introduced a screen-based quotation system (SEAQ)
LSE
NYSE
3.96.9 9.8
2.6 4.10.28
0
0
0
1
1
1
1985 1992 1994
Daily volume (in $Billion)
Trends and Threats
Big Bang
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 25
Attachment 1 - Automation of Trading posts
Post Information displays
Flat panel display screen
Point-of-sale workstation
Wireless data system
SAO XX-00 XXX\CASE NUMBER\SUBDIR\FILE NAME.PPT 26
Attachment 2 - The network effect
# of firms Sales of largest q1
Sales of second q2
Sales of third q3
Profits of largest p1
Profits of second firm p2
Profits of third firm
p3
1 0.6666 - - 0.2222 - -
2 0.6357 0.2428 - 0.1726 0.0294 -
3 0.6340 0.2326 0.0888 0.17007 0.0231 0.00035
Source: The impact of the Internet on financial markets -
Nicholas Economides