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August 23, 1998


By CBR Staff Writer

There is an undercurrent in the online securities trading market which may see several of the leaders, such as E*Trade Group Inc, getting together on an initiative to funnel their collective trades into one common trading system run by an electronic communications network (ECN). One such ECN, Datek Online Holding Corp’s Island system, has approached several major online brokerage firms about doing business on its network. Robert Bephge, vice president at Datek, said his firm has talked to various broker-dealers about moving to the Island system. ECNs, he explains, are more effective in terms of speed and quality of transactions and order execution when they carry more traffic. There are currently seven ECN registered with the Securities and Exchange Commission which can charge for processing transactions. Of those, Island claims to be the second-largest ECN around, behind only Reuters Holdings Plc’s Instinet, the industry pioneer. Island currently boasts more than 100 brokerage partners, although it will not reveal any names. Bephge said the system handles close to 100,000 transactions per day. A recent report in The Wall Street Journal speculated that if someone like Datek can succeed in consolidating the lion’s share of leading online brokerages’ transactions on the Island network, we could see the advent of a super-ECN which could independently match more than 200,000 orders per day. The possibility would then exist that the ECN itself would function as, and essentially become, an exchange in and of itself, the Journal continues. Bephge doesn’t discount that possibility. He believes that the current regulatory climate is almost right for giving the green light to the country’s first new exchange in decades – a 24-hour online one. It is simply a matter of whether the SEC decides to allow alternative trading systems to register as exchanges, something it has been hesitant to publicly comment on thus far. The numbers would support such a decision, though, as last year online trades represented roughly 17% of all trades from individual investors. And the SEC itself estimates that alternative trading systems now handle 20% of The Nasdaq National Market’s daily volume and about 4% of The New York Stock Exchange’s volume.

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