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ECNs and Nasdaq slug it out

The five-year battle between Nasdaq and ECNs is heating up. Nasdaq launches SuperMontage in July, a worthy rival to the ECNs’ trading systems that could win back dealflow. Meanwhile ECNs are depriving Nasdaq of crucial revenue. Is this the start of the trading endgame?

One of the main information pages on Nasdaq's market data website gives rise to a bit of a shock. After several years of building market share in handling buy and sell orders in Nasdaq stocks, Island's slice of the pie appears suddenly to have all but disappeared.

Its share of trade volume had breached 20% by September last year and stayed there until February when it dropped to 17.6%. By March, though, Island accounted for just 3.3% of Nasdaq trades, and by April this was down to 2.8%. Its proportion of dollar and share volume suffered similar falls.

On the face of it, this looks like a disaster for a firm that had been the fastest-growing electronic communication network (ECN) in trading Nasdaq stocks. Perhaps its core customer base - retail investors - has dried up? Perhaps it's had a technological catastrophe, or is under investigation for some alleged crime - after all, who isn't? It would certainly offer one explanation why there are renewed rumours about Island being bought by rival Instinet.

There's a much more simple explanation: starting in February, Island started to report most of its trades on the Cincinnati Stock Exchange, an all-electronic regional exchange based in Chicago.

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