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Q: Will regional exchanges be both customers and competitors with ECNs? And what will the competitive landscape look like?
William Karsh, Direct Edge: ... As Reg NMS comes online, we are likely to see increased segmentation and fragmentation of orders - and this will help ECNs. Regional exchanges will need to play ECN in terms of technology and super-quick executions, and adapting to Access Rule requirements [which establish private linkages and cap fees for quote access] and ultimately do business with ECNs if they are going to make it. So, those that make it will be both a competitor and a customer.
Robert Miller, PHLX: Local exchanges, though, such as the Philadelphia Stock Exchange, are changing. Because of the cost of maintaining floor-based models, we and other exchanges will be coming out with open architecture systems that will increase the speed and reduce the cost of a trade.
Reg NMS, as well as increased algorithmic trading, will lead to fragmentation of orders, that's true, and this will route some order flow our way. So regional exchanges will do well. Of course, in some cases, we will find ourselves working with ECNs as we try to find and present the best price for our customers. At the same time, we will be competing for order flow.
Chintan Gandhi, Random Walk: Reg NMS will definitely lead to fragmented orders, and some of these pieces will make their way to regional exchanges. But exchanges will also find themselves doing business with ECNs out of necessity.
Karsh, Direct Edge: I think the fact that exchanges are trying to copy ECNs just validates our model.
Miller, PHLX: There is room for both the exchange and the ECN.
Q: Is increased consolidation or fragmentation expected in the ECN space? What about among regional exchanges?
Karsh, Direct Edge: With fragmentation of order flow, it is likely that new ECNs will emerge. This will take its course, and then we will probably see some consolidation from there.
Regional exchanges, though, face several problems. They will experience technology growing pains as they look to compete with ECNs, and frankly, there may be some failures. Consolidations are also a possibility.
Gandhi, Random Walk: It's very possible that new ECNs could pop up. But this may present an opportunity for the NYSE and the Nasdaq to purchase them. So there is likely to be some fragmentation, followed by consolidation, as Mr. Karsh said. Although, if ECNs are acquired by Nasdaq or the NYSE, for example, they could provide increased competition for ECNs. We could also see some consolidation among regionals, who could, in turn, challenge the [NYSE and Nasdaq] and the ECNs.
Miller, PHLX: But I just don't see the synergies in terms of consolidation. They just don't jump out. Although, as regionals come out with new technology and a diversification of products, and possibly new types of orders, some exchanges could work together. That's possible.
Karsh, Direct Edge: Regionals will need to quickly scrape the edges off the Nasdaq and the NYSE, which have been quicker to react to the changing markets. Remember that because of the subpenny rule and generally slimmer spreads, there isn't as much money in being a market maker or a specialist. It's about order flow. And ECNs are getting that order flow. Regionals are in a tougher position than in the past.
Miller, PHLX: Regionals, though, will be working and interacting with ECNs and the so-called dark books to access liquidity.
Karsh, Direct Edge: ECNs already provide liquidity and can and will ping the dark books. Exchanges, especially regionals, will be playing catch up.
