Latin American Capital Markets

PROMOTING REGIONAL CAPITAL MARKET INTEGRATION 183nisms may deliver orders.The longest-running regional integrated order-routing facilityhas been the Intermarket Trading System (ITS), developed in the United States,again at the prompting of the Congress and the SEC.The goal of the ITS is to provide an intermarket communications linkage bywhich a member of one exchange may trade with a member from another exchange,provided that the first exchange furnishes continuous two-sided quotes in the security.35 Operation of the ITS presupposes the existence of a mechanism such as theCQS to disseminate quotes in the market, as market participants must be able to seewhich exchange is quoting the best price in the security in which they are interested.A member of a participating market wishing to trade at a price quoted on anothermarket can send a commitment to trade to the other market A commitment totrade is a firm order that is good for a prespecified period of either one or two minutes.If the quote is still available at the market to which the commitment to trade issent, or if a better price is available, and if the market rules permit an execution atthat price, the market must accept the commitment and execute the order If thecommitment is not accepted within the specified time frame, it is automatically canceled.Partial executions may occur All the exchanges and NASDAQ participate inthe system.In the mid-1980s, five order-routing linkages between various securities exchangesin the United States and elsewhere were proposed. 36 Of these, three werelinkages between a U.S. exchange and a Canadian exchange, and the other two werebetween a U.S. stock exchange and the LSE. Only three of the proposed linkageswere actually established, and all of them subsequently failed.The most ambitious wasbetween the American Stock Exchange (Amex) and the Toronto Stock Exchange(TSE). It was between two primary markets, intended to involve trading in differentcurrencies, and joined two trading floors with many dissimilar trading procedures, includingdifferent market-making systems, different priority rules for the execution oforders, and somewhat different concepts of agency and principal transactions. Amongthe anticipated benefits of the link were that it would give investors in both countriesan opportunity to obtain the best prices in either country for dually listed stocks,faster executions, more cost-effectiveness, and greater liquidity.The linkage started with a pilot scheme that allowed orders to be sent fromthe floor of the TSE to the floor of the Amex for execution. Although it was also in-35 The ITS arose as a result of Section 11 A(a)(3.(B) of the act and SEC Rule 11 Aa3-2. Since its inception, it has beenamended many times.36 This discussion is taken from Lee (1999, pp. 73-76).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub