Island Ecn - The Emergence Of Island

THE EMERGENCE OF ISLAND

The groundwork for Island ECN was laid by Joshua Levine, who in the mid-1990s wrote the software that would become the basis for its electronic trading system. Levine's system grew out of NASDAQ's SOES—small order execution system—which was introduced after the 1987 stock market crash. SOES automatically matched trades of 1,000 shares or less, making it possible for investors to deal with one another directly, without the intervention of the traditional middlemen.

Island was founded in 1997 by Jeff Citron and Levine with funding from Datek Online Holdings Corporation. Island was an immediate hit, its popularity driven in part by the day trading fad of the late 1990s. The effects were felt throughout the stock world. Competing ECNs were soon opening their virtual doors, and NYSE and NASDAQ were compelled to look for ways to simplify their business in order to meet the challenge. Levine himself fueled the competition with his outspoken criticisms of NYSE and NASDAQ as anticompetitive monopolies. Thanks to Levine's efforts, the NYSE eventually repealed its rule prohibiting its members from trading substantial amounts of NYSE-listed stock off the trading floor. The repeal made it possible for Island to begin trading in stock listed on the New York Stock Exchange.

Levine stepped aside in 1998 and was replaced as Island's President and CEO by Matthew Andresen, who was also fired by a passion to change the way securities were traded. Under Andresen, in June 1999 Island applied to the SEC to become the nation's first for-profit exchange, enabling it compete head-to-head with NYSE and NASDAQ for orders. Some critics speculated market status would impose on Island the crippling costs of instituting and enforcing a complex set of SEC rules. Island maintained that its electronic form and the high degree of transparency that form entailed—providing, for example, an easy-to-follow audit trail for every order—would make enforcement far easier than in traditional securities markets. It would also provide Island with the opportunity to make millions of dollars in earnings every year from the sale of its market data.

After being fined for several trading violations, Island's parent Datek sold a 90 percent interest in Island to a group comprised of Bain Capital, TA Associates, and Silver Lake Partners. The sale was seen by some as an attempt to distance Island from Datek's problems while its exchange application was being considered. As of October 2001 the SEC had not handed down a decision on the application.