On the Competition

between

ECNs Stock Market and Market Makers

By E. Ben-Hamou (LSE)

and T. Serval (Toulouse /Harvard)

Importance of the competition

• Exploding sector via Electronic markets (NASDAQ, EUREX, LIFFE …European development: Jiway with Morgan Stanley and OM group, Mitsui and Goldman...

• Emergence of new financial Intermediaries :– Electronic Communication Networks (Instinet, Island,

…)– Internet brokerage (e-trade, C. Schwab, Ameritrade …)– on-line bond trading, on-line IPO

The big picture

JP Morgan

REDIBook

DLJBear Stearns

Instinet

StrikeOptimark

BRUTArchipelago

Merrill Lynch

Goldman Sachs

Dow Jones

Nasdaq SoftBank

PCX

KnightTrimark

ASCSunguard

E trade Gary Putnam Southwest securities

TownsendCNBC

Reuters Salomon Smith Barney

Herzog

Heine Lehman

PaineWebber

Schwab SLK

Fidelity TD Waterhouse

Morgan Stanley Dean Witter

Island TradeBook NextTrade AttainLVMHDatek

Bloomberg PIM All TechTA associates

Literature reviews

– Market micro-structure:• Nasdaq vs NYSE: Haris (1990), Huang and Stoll

(1996)

• Collusion: Christie&Schultz (1994), Demsetz (), Biais, Foucault, Salanie (1998), Dutta& Madhavan (1997)

• Electronic order book: Glosten (1993)

• ECNS Henderscott& Mandelson (2000)

– Network Economics:• Economides (1992, 1993, 1995),

• Farewell&Saloner (1992)

The ECNs from Financial information networks to electronic Stock markets

– Connectivity of the financial networks• positive externalities• importance of the installed basis• critical mass• proprietary trading systems versus open systems • Interconnection between networks

– Anonymity and transaction costs• Anonymity and liquidity• matching service• price of immediacy on real time market.

The future of the Market place

– The diffusion of technology• Partially compatible networks

• The effect of internet

• New competitors: the existing information networks

– Convergence and Globalisation of financial networks• Competition between networks in the US may lead to

world wide networks

• Trade-off between fair prices and fixed costs: a regulation problem to come

• The sign of convergence