fourth markets
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Fourth Markets . Crystal Cady • BA543 Spring 2013. Brief Introduction to ECN’s . Off-exchange trading in the market Computerized system that allows traders to bypass major stock exchanges, brokers & trading floors Primary products traded are stocks and currencies - PowerPoint PPT PresentationTRANSCRIPT
FOURTH MARKETS
Crystal Cady • BA543 Spring 2013
Brief Introduction to ECN’s Off-exchange trading in the market
Computerized system that allows traders to bypass major stock exchanges, brokers & trading floors
Primary products traded are stocks and currencies Considered ‘fourth market’
Relatively new phenomenon for individual traders Until recently were only used by financial institutions
and market makers
Sanctioned by the SEC Played a key role in growth of ECN’s
Why ECN’s? An alternative to the conventional equity trading
arrangements
ECN’s were created to bypass the other exchanges and trade directly with one another Access to favorable pricing Ability to trade after-hours
Designed to be a trading system for institutional investors Allows traders to meet in an anonymous market Allows for trades all over the world regardless of physical location
History of ECN’s Began operating in 1969
Instinet was the first ECN Operated similar to broker-dealer for nearly 30
years SEC imposed order handling rules in 1997
Created a new category that applied to Instinet (ECN)
Allowed for individual (retail) trading in addition to institutional
Negative effect on NASDAQ Number of ECN’s rose significantly Resulted in major loss of volume in under two years
History of ECN’s New entrants in the 90’s took on retail flow By 2000 nearly a dozen ECN’s existed
Archipelago bought Pacific Stock Exchange to become the first fully electronic stock exchange
Consolidations reduced the number down to a few
Once only larger players remained several applied to SEC to become an exchange Allowed for faster, more direct transactions
Today’s Major ECN Players Bloomberg Tradebook LavaFlow
A division of CitiBank ArcaEdge
Merger of Redibook and Archipelago
How ECN’s Work Two main types: Retail & Institutional Pass on prices from multiple market
participants Display the best bid/ask quotes on
platforms ECN- brokers also serve as
counterparties to forex transactions What is a forex transaction?
Make money by charging customers a fixed commission for each transaction
Pro’s of ECN’s Achieve better bid/ask prices Can trade on prices with little or no spread
Why is this important? Genuine ECN brokers will not trade against
you Prices may be more volatile
Better for scalping purposes Can take on role of market maker
Con’s of ECN’s Many don’t offer integrated charting &
news feeds Trading platforms tend to be less user
friendly Difficult to calculate stop-loss and
breakeven points in advance Traders have to pay commissions per
each transaction
TIP: Get yourself a good broker!