Nasdaq Stock Market - Rivalry With Ecns And Supermontage

RIVALRY WITH ECNS AND SUPERMONTAGE

In the late 1990s, Nasdaq was challenged by a new breed of trading entities known as electronic communication networks (ECNs). ECNs spearheaded the public's zest for electronic trading, and their astonishing success led many Wall Street analysts to believe that they were the wave of the stock market's future. ECNs claimed to democratize investing by making it cheaper and bringing it directly to the public at large, reducing the reliance on large brokerage firms. While the rapid turn-around of the dot-com economy in the early 2000s also served to sour the revolutionary prospects for many ECNs—to the point that many, including Island ECN, were turning into exchanges themselves—there was little doubt that these upstarts greatly accelerated innovation and modernization among the major exchanges, particularly Nasdaq. For instance, ECNs led the way in opening after-hours trading and listing share prices in the more accurate (and less fraud-prone) decimals, rather than in fractions. Having adopted much of the ECN-driven innovation, and with a vastly greater economy of scale, Nasdaq was expected to make it much more difficult for its one-time rivals to compete.

For instance, one practice for which ECNs roundly criticized Nasdaq was its refusal to offer customers information such as comparative pricing for individual stocks, which would then allow customers to get the best deal. In the early 2000s, however, that changed with the introduction of Nasdaq's SuperMontage, a quote aggregation and execution system. SuperMontage was a serious blow to the ECN competition, since it offered most of the same functions that distinguished ECNs. Nasdaq spent the early 2000s pushing SuperMontage through the SEC approval stages. Because of its similarities to the ECN model, SuperMontage raised the ire of ECNs, who claimed that the system would effectively amount to an ECN that enjoyed government-mandated liquidity, putting ECNs at a hopeless disadvantage, and worse, turning their regulator into a competitor.