IS 356 IT for Financial Services Alternative Trading Systems (ATS) and Electronic Communications...

IS 356IT for Financial Services

Alternative Trading Systems (ATS)and

Electronic Communications Networks (ECN)

http://www..evergreen.loyola.edu/~pptallon/is356.htm

April 21, 2023© Paul Tallon 2/15

Definition Definition An Alternative Trading System (ATS) is a networked

application that connects potential buyers and sellers of securities electronically, and matches trades that meet predefined criteria.

An Electronic Communications Network (ECN) is an ATS that has been registered with the SEC as either a broker/dealer or an exchange.– Broker/dealer = www.island.com – Exchange = www.archipelago.com (Arca|Ex)

Class Question: What’s the added benefit of registering as an exchange?


Examples of ECNsExamples of ECNs

Class Question: Consolidation is taking place (why do you think this is?)


Vol. distribution - NYSE listed stocks

Source: Goldman Sachs Trading & Market Structure Analysis

Other exchanges

3%

Nasdaq InterMarket

15%

NYSE77%

ARCA1%

Chicago4%

2%

1%

12%

0%

Broker-dealers Posit Other ECNsand ATSs

Seeing through Nasdaq InterMarket

Single-counted, share volume

Internal matches only All hours Excluding ETFs

October 2003

Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University


Vol. distribution – Nasdaq stocks

Distribution by Execution Venue

Nasdaq SM17%

ARCA25%

Liquidnet0.1%

Instinet & Island23%

Posit0.5%

Chicago1%

Other33.4%

October 2003

Share volume Single-counted Internal matches only All hours Excluding ETFs

Mostly broker-dealer upstairs trades

But also small activity on:

• Brut

• NexTrade

• MarketXT

• Attain

• TradeBook

• Other ATSs

2 to 5 percent?

Source: Goldman Sachs, Trading & Market Structure Analysis

Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University


Consolidated quotes Consolidated quotes


Trade through Rule (TTR)Trade through Rule (TTR) Instituted in 1975, the TTR was designed to make sure investors got the

best available price for their stock trade. The TTR means that if you place an order and the best quote is with a

specialist on the floor of the NYSE, then your broker is required to route your order there Applies only to NYSE stocks since a MM would match the best price on a

NASDAQ stock without having to route the order to that MM offering the best price

While a quote on a NASDAQ stock is executable, a quote on an NYSE stock is an indication and not a firm quote.

Specialists are allowed to hold an order for 30 seconds before either executing it or handing it off to another specialist—and during that time, the price may change.

NASDAQ members charge NYSE specialists with bait-and-switch pricing tactics so that orders are routed to the NYSE, then executed at a worse price than was available at the time the order was entered.

Based on article by Theresa Carey in eWeek 7-28-04


Clearing MechanismsClearing Mechanisms After a trade takes place (i.e., becomes locked-in), then what? There must be an exchange of cash for securities Third parties offer clearing/settlement services Possibility of self-clearing (e.g., Raymond James)

Fee for service charged back to broker Trades clear in 3 days (T+3) Stock borrowing in the interim

http://www.nscc.com

Exch.

Clearing

Buyer Seller

SecuritiesFunds

SecuritiesFunds


Stock BorrowingStock Borrowing The Continuous Net Settlement (CNS) System is an automated

book-entry accounting system that centralizes the settlement of compared security transactions and maintains an orderly flow of security and money balances.

The Stock Borrow Program allows participants to lend NSCC (National Securities Clearing Corp.) available stocks and fixed income securities from their account at The Depository Trust Co., to cover temporary shortfalls in the CNS System. NSCC credits members' accounts with the full market value of securities borrowed, and members can earn overnight interest on that value by investing the funds.

Class Question: What are some risks associated with this program?


When the financial markets close, SIAC’s computers keep going, processing, on behalf of the Depository Trust & Clearing Corporation (DTCC) and its affiliates, nearly 100 percent of the equities and fixed income securities traded in the U.S. each day.

SIAC’s Shared Data Center alone is linked to the securities industry by more than a thousand communication lines over which an average of 70 billion bytes of data are transmitted daily.

SIAC plans, develops, implements and manages a variety of automated information-handling and communications systems. These systems support order processing, trading, market data reporting, trade comparison, surveillance, clearance and settlement for a broad range of securities.

SIAC SIAC (subsidiary of NYSE)(subsidiary of NYSE)


Block TradingBlock Trading Strictly sold to the buy-side – suitable for large blocks Launched in 4-2001 with 38 members

– currently has 582 buy-side traders Average trade size is 57,000 shares Traded $11.5 billion of NYSE equities in first year Quantity discovery, not price discovery

– facilitates negotiation of price NYBX open January 2009

– NYSE Euronext now in partnership with Liquidnet (June 09)

Check out the Liquidnet Website


ETFs & SPDRsETFs & SPDRs Different from Mutual Funds (buy/sell at NAV)

Trade directly on exchanges during the day Lower expense ratios than with most mutual funds Nov ‘09: 779 ETFs, $737,922m in assets (www.ici.org) Barclay’s iShares traded on AMEX SPDR – benchmark S&P 500, 9 sector SPDRs QQQ – Nasdaq 100 Tax implications


http://www.spdrindex.com/


For Next Class… For Next Class… Read

– Check out www.liquidnet.com for next class

– Look for other block trading venues: NYBX

IS 356 IT for Financial Services Alternative Trading Systems (ATS) and Electronic Communications...

Documents

Transcript of IS 356 IT for Financial Services Alternative Trading Systems (ATS) and Electronic Communications...