Latin American Capital Markets

GLOBALIZATION.TECHNOLOGY; AND REGULATION IN CAPITAL MARKETS 49Figure 2-4 I Order Book Executionalong with exchanges that have a physical location. A similar trend has been occurringin Europe. For example, two-thirds of all trading in Germany takes place on DeutscheBourse's electronic trading platform, Xetra. 4 Buy and sell orders are entered into anelectronic order book, and transactions are done when bid and ask prices match, asshown in figure 2-4.Alternative Trading SystemsAnother innovation in trading systems has been the increase in the importance ofalternative trading systems (ATSs) and electronic communication networks (ECNs).These new trading systems have captured a significant share of the trading volumeof traditional exchanges. ECNs account for 35-40 percent of trading in NASDAQstocks, particularly the largest stocks. ECNs are similar to an electronic order book;they are automated proprietary trading platforms with no market makers or specialists.Investors can anonymously enter orders into the system, which then matches buyand sell orders. If a matching within the ECN does not occur then the order is routedto other ECNs or exchanges, as shown in figure 2-5.ATSs provide services somewhat similar to an exchange, but they are not anexchange and neither are they regulated as an exchange.They have raised the questionof what is an exchange and how an exchange differs from other trading systems.A number of issues regarding the operation and regulation of ATSs have arisen thatwill need to be addressed by emerging markets in the near future.Electronic order books and ECNs work particularly well for the execution ofsmall orders in highly liquid stocks. However, for large block trades and for trading inless liquid stocks, the role of market makers/dealers/specialists becomes importantand should be integrated within an electronic limit order book or an ECN. TheCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub4 Vision and Money: E-Trad/ng, January 2000.