Section 2 - FTSE

ECNS RING CHANGES IN THE TRADING LANDSCAPE
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characteristics and terminology used to describe these
different platforms can be confusing. In simple terms then,
how do alternative trading systems (ATS), electronic
communication networks (ECN), crossing networks, MTFs
and stock exchanges differ from each other?
The common thread is that most are electronic trading
platforms. Breaking it down further, in official parlance, an
ATS across in North American markets is a networked
application that electronically connects potential buyers
and sellers of securities, matching their trades on
predefined criteria. This can include call markets, matching
systems and crossing networks as well as electronic
communications networks (ECNs).
While there is confusion over the precise definition of an
ECN, at its most basic level it is an electronic marketplace
that facilitates the buying and selling of stocks by lining up
brokers and market-makers that trade on behalf of
institutional and retail investors without sending the order
through an exchange
for execution. In
Europe, under MiFiD,
ECNs and crossing
networks are mostly
referred to as MTFs,
which can offer a
displayed market as
well as dark orders and
quotes. They all differ
from the established
stock exchanges in
that they do not trade
their own list of stocks
nor do they hold initial
public offerings.
It is no surprise, perhaps, that industry participants often
refer to all of these different types of platforms, except the
exchanges, as electronic venues. As Alasdair Haynes, chief
executive officer and head of ITG’s international business,
points out,“You need a dictionary to understand what the
market looks like and I think there needs to be more
clarification. For example, some might ask what is Chi-X
(the first order-driven pan-European equities alternative
trading system launched by Instinet this past March). Is it
an ECN, MTF, ATS or quasi-exchange? The exchanges are
looking at what the MTFs are doing and visa versa in terms
of offering different value products. No one wants to be left
behind and they are encroaching on each other’s territory.”
Alan Jenkins, European head of MiFiD at BearingPoint, a
UK based consultancy, agrees, adding,“It does seem that all
the acronyms are becoming synonyms for each other. In
Europe, ECNs now have a new name - MTFs - although
they do not get off that lightly and have similar obligations
as fully fledged exchanges under MiFiD.The result, though,
will be that liquidity will fragment further and we will see
a proliferation of new data and execution venues in the first
12 to 18 months of MiFiD. Then in the next two to three
year period, people will start to work out which are the best
In Europe, under MiFiD, ECNs and crossing
networks are mostly referred to as MTFs, which
can offer a displayed market as well as dark
orders and quotes. They all differ from the
established stock exchanges in that they do not
trade their own list of stocks nor do they hold
initial public offerings.
trading venues and liquidity will coalesce around a small
number of platforms just as it happened in the US.”
Right now, there is a great deal of buzz around the
advent of dark pools. These are electronic trading venues
that match buyers and sellers anonymously, without
quoting prices. For institutional investors, these deals are
usually done at the mid-point of the underlying market
price, which saves half the bid-offer spread. Another
advantage is that market impact, which can account for up
to 80% of transaction costs, is eliminated.
Although it has been touted as a recent phenomenon,
dark pools are not a new concept, according to Joseph
Cangemi, managing director of BNY ConvergEx, the
agency brokerage, research and technology affiliate of Bank
of New York Mellon. In the old days of floor based trading,
if a broker had received a large order, he would not show
his full hand. Instead, they would work it in smaller pieces
while disclosing the least amount of information possible
and only to those they
trust.
Dark pools have
mushroomed in the
US with estimates
having it that around
40 to 45 are in
operation, although
the types of liquidity
pools vary
dramatically. There are
agency brokers that
only handle client
orders and cross
those, where possible.
These include ITG, which pioneered the dark liquidity
model, Instinet and relative newcomers, Pipeline Trading
Systems and Nyfix Millenium. On the independent front,
Liquidnet is the most prominent player, catering to the
buyside. This means that institutions can trade with each
other without using a broker.
Investment banks, on the other hand, offer crossing
networks that match their own proprietary orders with
those of institutional, hedge funds and retail clients. Many
household names have also banded together to create
Block Interest Delivery System Trading (Bids) in an attempt
to increase competition and liquidity in equities trading.
These include Citigroup, Goldman Sachs, Lehman
Brothers, Merrill Lynch, Morgan Stanley and UBS and
more recently, Bank of America, Bear Stearns, Credit
Suisse, Deutsche Bank, JP Morgan and Knight Capital
Group have invested in the system.
In addition, broker-dealer-owned platforms have started
to link with other broker-owned and/or independent dark
liquidity pools, which again can distort the dividing lines.
For example, Credit Suisse has linked its CrossFinder with
Instinet CAB, Fidelity CrossStream, Lehman LCX,
Liquidnet and others. Merrill Lynch and ITG, on the other
hand, have joined forces to launch Block Alert, a global
NOVEMBER/DECEMBER 2007 • FTSE GLOBAL MARKETS