1. FOURTH MARKETS Crystal Cady BA543 Spring 2013

2. 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

3. 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

4. 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

5. 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

6. Today’s Major ECN Players  Bloomberg Tradebook  LavaFlow  A division of CitiBank  ArcaEdge  Merger of Redibook and Archipelago

7. 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

8. How ECN’s Work

9. 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

10. 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!

11. QUESTIONS?