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Simmons: Nasdaq’s chairman and |
Nasdaq’s new electronic trading system, SuperMontage, was widely expected to wipe out the ECNs (electronic communication networks) that have succeeded in winning so much of its trading volume. But the completion of SuperMontage’s roll-out on December 2 – after a six-week piecemeal process of adding stocks to the system – left market shares virtually unchanged by year-end.
Market-share statistics have been volatile but according to research by Putnam Lovell, SuperMontage’s share of stocks then on its system actually fell over the week ending November 11. SuperMontage’s market share for the 985 stocks then trading was approximately 21%, well below its January to August average of 28.5%. Instinet/Island’s market share by contrast was 29.3%.
Nasdaq declines to reveal SuperMontage’s market share since the roll-out was completed or to say what market share it would consider a success. Dean Furbush, executive vice-president of transaction services at Nasdaq, does however claim to be “very comfortable” with the statistics.
Nasdaq meanwhile has other problems. Profits have evaporated along with the tech boom and overseas ventures have either failed or been described as “non-events”. Nasdaq chairman and chief executive Wick Simmons is now set to leave the company this year following a row with the board.
The preliminary indications of market share should not be read as a reliable prediction of the outcome of the Nasdaq vs the ECNs battle. To some extent SuperMontage’s failure to shine as some had expected is a combination of misplaced expectations and the fact that the system is still so new. Users of SuperMontage, however, are impressed and the system was implemented without a hitch. So despite the lack of a significant impact on market share Furbush claims that Nasdaq deserves an “A” for the roll-out.
The big changes that SuperMontage brings to the trading environment, the structural change of introducing what is effectively a new ECN, were felt immediately. So it may be misguided to expect radical change now that all Nasdaq’s stocks are available.
While Nasdaq was preparing to shake up the equities trading environment with SuperMontage, the ECNs were also making fundamental changes. Instinet and Island merged, combining their order books and adopting Instinet’s routeing technology so that orders are now routed to the destination offering the best price, including SuperMontage. Because Archipelago routes orders in the same way, SuperMontage no longer has an advantage in liquidity.
The consolidation of liquidity means that the differences between the ECNs and SuperMontage are now limited to speed and front-end systems. “There is very little of much importance to differentiate between the systems,” says Richard Leibovitch, head of trading at Putnam Investments. “With the liquidity aggregators like Lava, you can tap liquidity anywhere. They may offer things like preferential access to reserve books to entice you to enter your trade on them but it doesn’t make a big difference.”
To achieve real changes in market share the ECNs and SuperMontage will have to accentuate their differences. At the moment Archipelago has the clearest strategy. Archipelago plans to move its volume on to its exchange, which will allow it to implement its own trading rules. Nasdaq will need to allow users to get used to the system so can’t introduce any radical changes soon. Instinet/Island will also be occupied for some time in building their unified matching engine but there is talk surrounding their future with the Cincinnati Stock Exchange.
Round two between the ECNs and Nasdaq may have just started, so expect more to come.
