Could anyone comment on all the necessary steps needed to build an ECN from the groud up, I'm actually shocked at how profitable in the short amount of time BATS Trading have become. Also what are the major incentives for clients routing orders over a newly established ECN's? Are there any other incentives than the obvious execution speed, latency, and pricing.
I believe one has to get registered as a broker-dealer and find a firm to clear their trades. I think approval by NASD and compliance with their ATS regulations is required as well. The attraction to BATS or other ECNs - prices. An additional .001/share for adding liq can amount to hundreds of thousands of $ for those automated traders that do huge volume. My understanding, BATS is run by the people from Tradebot, an automated trading firm that already did huge volume on Nasdaq (neighborhood of 5% of Nasdaq's daily volume). It would make sense that adding liq on their own ECN would be profitable since they don't have to pay out to a liq provider, and would account for alot of the volume. My guess is that an ECN could be started for $3-6M if you did alot of things on the cheap. Some capital in reserve as well I would think to satisfy NASD.
The 1st step is always becoming a US broker-dealer... which takes at least 6 months... Or buying an existing BD... with management in place. There are many levels of BDs... From one person shops to Clearing Firms... And at the very least you would have to be a licensed Market Maker for several years... Licensed is many states, etc. And very well capitalized... And the NASD would take their sweet time approving anything you want to do. We are taking well into 8 figures here... And you will get exactly nowhere... Without a Major Wall Street Partner. This is a VERY incestuous business. People are getting all hot and bothered about BATS running at a loss to build market share ... But NASDAQ has seen ECNs come and go for 10 years.
Yes Nasdaq has seen them come and go, not cause they beat them - they bought them.. BRUT for $190 million INET (with Brokerage grp) $1.9 billion INCA bought ISLD for $500 million NYSE/ARCA and the other consolidation. The end game is not to topple Nasdaq (very unlikely), but get some decent market share - sell out for hundreds of millions (very possible). Considering their sister company Tradebot was a huge customer and took all that business away from Nasdaq - giving it to BATS. If they sell BATS to Nasdaq, which will probably come calling if they can get their mkt share to 10-20% - they will essentially be making Nasdaq pay for the right to get the mkt share back that Nas already had before BATS. Brilliant.
But how to get trading software to built access to your ECN, how to get people to use it? Remember ATTN? It is now EDGA that is owned by Knight I believe. No one used ATTN when it was on its own. NTRD?