Chapter 7 - Electronic Trading Networks

Abstract

This chapter focuses on the electronic trading networks in the United States. Direct market access (DMA) has become an integral part of trading technology in the United States since the 1997 order-handling rules facilitated the creation of electronic communication networks (ECNs). DMA offers the investors a direct and efficient method of accessing electronic exchanges through Internet trading. DMA gives the individual an autonomous role in deciding on an investment strategy, matching buyers, and sellers directly. This trading methodology allows investors to execute orders through specific destinations such as market makers, exchanges, and electronic communication networks. DMA tools permit buy-side traders to execute multiple venues directly without intervention from brokers. ECNs offer electronic real-time price discovery that enables buyers and sellers to transact relatively inexpensively with a minimum of intermediation. According to the TABB Group, there are currently five major ECNs: Instinet (INET), Bloomberg (TradeBook), Archipelago (ArcaEx), SunGard (Brut), and NASDAQ's own SuperMontage. Each of these ECNs is a liquidity pool that houses its own order books. Broker–dealers have been acquiring independent DMA vendors to remain competitive. Broker–dealers and investment banks have been encompassing DMA technology, leveraging it through program trading, traditional block trading, and transaction cost analysis services on top of DMA offerings.