Electronic – but to what effect?
ECNs have sold themselves by claiming to offer fast, competitive, electronic execution. But research suggests only the electronic claim is true.
An analysis of publicly available data by Celent, a financial services technology consultancy, shows that ECNs' average execution times for the five most liquid Nasdaq stocks is an appalling 15.5 seconds for small orders. Market makers, by comparison, execute the same trades in about one-tenth of the time, just 1.6 seconds. Surprisingly, ECNs performed faster than market makers when executing the least-liquid Nasdaq stocks, although their fill rates were far worse. ECNs achieved a fill rate for illiquid stocks of 30% or lower while market makers managed 80% or better.
ECNs as a group had the lowest fill rates for the most liquid Nasdaq stocks, averaging just 72%. Specialists, which as a group account for just a small percentage of Nasdaq trading, had fill rates of 100%, while market makers as a group achieved a fill rate of 91%.
In terms of price improvement, Attain, recently bought by Knight Securities, and Brut offered reasonable execution but Inet and ArcaEx were among the worst performers.
When all factors are considered, Inet, the largest ECN, ranks as the worst for execution out of the top 23 firms examined and Supermontage the second worst. Brut comes in at twentieth and ArcaEx, the highest-placed ECN, at thirteenth.