Subject: Trading - Off Exchange

Last-Revised: 20 June 1999
Contributed-By: John Schott (jschott at

Anyone can trade stocks off the current set of stock exchanges, if only on a person-to-person deal. This is not a far cry from the original trading under the Buttonwood tree in New York in the 18th century. Today, over 20% of the total volume on stocks traded on the NYSE and NASDAQ exchanges occurs off the official exchanges. However, the dealing is often on the 'non-exchanges' (often called electronic communication networks or ECNs). INSTINET is perhaps the best known of several ECNs now functioning. Most of these operations are members-only operations that function both during and after the normal exchange hours. All are electronic - that is, non-physical exchanges. Almost all are direct, in that there are no intermediaries such as specialists and market makers as on the NYSE and NASDAQ, respectively. So they function much like two people meeting in a person-to-person deal. One sells, the other buys. This sort of trade is efficient and economical in that no intermediaries need to paid, but because there are no intermediaries, there is much less liquididy than the traditional exchanges where a third party can serve as a volume buffer. Thus ECNs are ideally suited for the large block, sophisticated trader who wants efficient execution with a minimal distruption in the trade price that would occurr with public trading.

In todays internet world, several firms are planning to open such off-exchange trading to the public. Much of the focus is toward after hours trading. But once started, there is no limit to providing 24-hour, 7-day access. Perspective particiants range from Schwab to new startups. The SEC promises that some of the organized off-exchange operations can qualify as official exchanges. It was recently reported that Datek's Island ECN had filed with the SEC to be recognized as an official exchange.

One computerized system is even designed to provide total annomity: neither the buyer or seller or the operator of the computer system knows the identity of the two participants until after the system puts the two in contact.

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