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Ironically, when ECNs were developed the systems were not a
friend of the individual investor.
Initially, ECNs were not integrated into the national market system,
serving primarily as closed trading systems available only to institutions
broker-dealers. As a result, posted prices on the ECNs were better
those prices posted on Nasdaq, fragmenting the market and making disseminated
to the public less reliable. Ultimately, this had its most severe
impact on the individual investor. Spreads, difference between the
bid and ask price, were artificially wide the public markets. The
result for individual investors was inferior prices.
In response to the disparities in the market, the SEC adopted the
Order Handling Rules in January 1997 - requiring market makers and
to reflect in their quote the price of any orders they in an ECN if
the price was better than what they were displaying the public. |
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Investors won this round as the Order Handling Rules
caused spreads to narrow dramatically. However, loopholes are quite
common in the securities markets, and the Order Handling Rules did
not stipulate that all market participants had to display their ECN
orders to the public. Soon enough, many institutional orders and non-market
maker orders were not available to the public, impairing price transparency.
The SEC acted to eliminate the loopholes by adopting Regulation ATS,
allowing alternative trading systems to either define themselves as
a market participant and register as a broker-dealer or as a separate
market and register as an exchange. To date, Island, and NexTrade
have registered to become exchanges, and Archipelago has achieved
exchange status through the creation of Archipelago Exchange, the
result of an alliance between Archipelago and the Pacific Exchange.
The other ECNs are registered as broker-dealers
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MidnightTrader, Inc. is the leading provider of after-hours and pre-market stock trading news, charts, quotes, alerts, personal finance, and stock market information available. MidnightTrader journalists are subject to the MidnightTrader Editorial Handbook which requires fair presentation and disclosure of relevant interests. MidnightTrader 2009, All Rights Reserved
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