Business and Personal Finance Dictionary

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• ECN (ATS)
  
  Alternative trading systems, known as ECN's, have become integral to the securities markets, providing enhanced flexibility and reduced trading costs, as well as competition to the established securities exchanges and the NASDAQ Stock Market. In 1999, ECNs account for approximately 30% of total share volume and 40% of the dollar volume traded in NASDAQ securities. ECN's account for approximately 3% of total share and dollar volume in listed securities. In contrast, in 1993, ECN's accounted for only 13% of share volume in NASDQ securities and only 1.4% of listed share volume. The vast majority of ECN activity currently involves trading in NASDAQ securities during regular trading hours. In 1999, an average of 93% of ECN share volume was reported to be in NASDAQ securities. Approximately 96% of ECN share volume in NASDAQ National Market System ("NMS") securities was effected during the regular trading session from 9:30 a.m. to 4:00 p.m. The overall level of ECN activity in listed stocks remained relatively small in 1999, and around 26% of this share volume was effected in the after-hours market. In 2000 and continuing this year ECN's grew volume and market share even as consolidation has started to occur. Initially, ECNs were not integrated into the national market system, serving primarily as closed trading systems available only to institutions and broker-dealers. As a result, posted prices on the ECNs were better than those prices posted on NASDAQ, fragmenting the market and making quotes disseminated to the public less reliable. Ultimately, this situation had its most severe impact on the individual investor. Spreads, the difference between the bid and ask price, were artificially wide in the public markets. The result for individual investors was inferior execution prices. In response to the disparities in the market, the SEC adopted the Order Handling Rules in January 1997 - requiring market makers and specialists to reflect in their quote the price of any orders they placed in an ECN if the price was better than what they were displaying to the public. 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.
  
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