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On the Competition Between ECNs, Stock Markets and Market Makers

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  • Eric Benhamou
  • Thomas Serval

Abstract

Favored by the Security Exchange Commission, Electronics Communication Networks (ECNs) have grown as alternative trading systems that enable to bypass the markets makers on the stock markets and allow investors to directly compensate and execute their orders with more discretion and at a lower cost. In this paper we underline the fragile character of the current ECNs and question their competitive advantages through empirical evidences. We find a rationale for market makers and ECNs excessive spreads and overreactions. The use of network theory highlights notions of critical mass, open interface and alliances. Moreover, since competition between market makers and ECNs is based on volume, the emergence of ECNs has been mainly possible because of the growth of the American stock market. Furthermore, strategies of new ECNs are built on anticipated future growth. Should the market shrink, ECNs would rapidly be forced to merge and most of them would disappear.

Suggested Citation

  • Eric Benhamou & Thomas Serval, 2000. "On the Competition Between ECNs, Stock Markets and Market Makers," FMG Discussion Papers dp345, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp345
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    Cited by:

    1. Rasmeet Kohli, 2014. "Market fragmentation of securities market: traditional exchanges versus alternate trading venues," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 7(2), pages 303-314, September.
    2. Cécile Carpentier & Jean-Marc Suret, 2003. "The Canadian and American Financial Systems: Competition and Regulation," Canadian Public Policy, University of Toronto Press, vol. 29(4), pages 431-447, December.
    3. Dejan Eric & Ivan Stosic, 2012. "Development of European Financial System: Challenges for the Balkan Countries Integration Process," Book Chapters, in: Paulino Teixeira & António Portugal Duarte & Srdjan Redzepagic & Dejan Eric (ed.), European Integration Process in Western Balkan Countries, edition 1, volume 1, chapter 6, pages 114-143, Institute of Economic Sciences.
    4. Sofia B. Ramos, 2003. "Competition Between Stock Exchanges: A Survey," FAME Research Paper Series rp77, International Center for Financial Asset Management and Engineering.

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