Execution Quality in Equity Trading: Electronic Communication Networks

February 13, 2004

Abstract

New York, NY, USA February 13, 2004

According to Celent Communications, ECNs provide price improvement to 10% of Nasdaq executed share volume, and to 20% of executed share volume on Amex and NYSE.

Celent Communications has analyzed execution quality data reported by major executing market centers, which are required by SEC Rule 11Ac1-5 to report these data on public Web sites, to compare execution quality among similar market center models. Celent is publishing the results of its analysis in a series of nine reports.

The first of these reports, " ," compares execution certainty, speed, price, and spreads among six ECNs: Attain, Brut, Instinet, Island, Nextrade, and Tradebook. The findings contradict certain perceptions of best execution by ECNs, which are known for fast executions but somewhat inferior prices.

In addition to the findings related to price improvement, other findings include:

Speedy executions are not as speedy as expected from electronic trading platforms.

Marketable orders on some ECNs wait as long as 3-5 minutes for execution. Results vary by ECN, but BRUT has among the lowest average speeds in the listed markets.

Certainty of execution on ECNs is not so certain.

"Averaging the execution rates of all market participants included in this report series (including ECNs, specialists, market makers, institutional and retail brokerages, among others), 83% of marketable share volume is executed. In contrast, ECNs execute only 39% of their marketable share volume."

According to Jodi Burns, the report痴 author, "This report will shatter stereotypes about ECN execution quality. Electronic trading platforms lacking specialists or market makers can still provide superior prices. However, using an electronic trading platform does not guarantee an immediate execution. In fact, several marketable orders waited more than three minutes for execution, which is an eternity in today痴 markets."

However, the author cautioned that, "these execution quality statistics can be a reflection of the nature of order flow going to a particular market destination, rather than reflecting the execution quality provided by that market destination."

This nine-part series will also examine execution quality for: national specialist firms, regional specialist firms, exchanges, institutional broker-dealers, retail broker-dealers, wholesalers, national full-service firms, and regional full-service firms.

The 81-page report contains 45 tables and 12 figures.

A is available online.

of Celent Communications' Retail Securities & Investments and Institutional Securities & Investments research services can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.

        

Send mail to info@celent.com with questions or comments about this Web site.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

 

New York, NY, USA February 13, 2004

Execution Quality in  Equity Trading

Return to report Abstract

 

EXECUTIVE SUMMARY 3
INTRODUCTION 5
METHODOLOGY 7
  Caveats About 1-5 Data 7
KEY FINDINGS 9
CERTAINTY OF EXECUTION 11
SPEED OF EXECUTION 17
  Execution Speed by Time Period 17
  Cross-Table Analysis 31
  Execution Price by Speed 34
  Cross-Table Analysis 41
EXECUTION PRICE 46
  Share Volume Executed by Price 46
  Cross-Table Analysis 53
  Dollar Deviations From the NBBO 56
IMPLICIT EXECUTION COSTS 61
ANALYSIS OF HIGHLY LIQUID STOCKS 67
OBJECTIVITY & METHODOLOGY 80

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