Excellent points esc. ECN have taken alot of volume away from the MM's, and that was the Nasdaq's plan. They failed their, SuperSOES, NAQCESS, etc, and the ECNs always reinvent themselves. One ECN that has not been mentioned is INCA (the original ECN). If you folsk remember INCA stuck hard to their 1.5 cent per share, and ISLD crushed them. The INCA CEO was asked in an interview on CNBC bacl in '98 if INCA would ever acquire ISLD, and he said "No, ISLD is an Island onto itself". Now look. INCA has not only dropped their prices, but they have been real aggressive with rebates, now that they own the business model of their former and primary nemesis. As far as fractional pennies go, I don't think you're going to see that go away. Remember, the MM's still need to eat. Some of the biggest MMs got slammed with teenies, pennies, and then the sour puss on "payment for orderflow". That's why there are so many ex-market makers getting jobs as prop traders. Besides, fractional pennies are an annoyance for swing traders, and all traders at tax time, but their a great tool for daytraders. Before the fractional pennies, it was great outbidding someone by 1/256 on INCA pre-1997. I would bet that Nasdaq will have some new proposal by mid-next year (another swing at the ECNs) Be well.
If I'm not mistaken Nasdaq and ARCA don't accept sub penny orders. I know ISLD always has and INCA as well. I think the sub-pennys are good if you are a taker of liq (momentum trader), bad if you are provider (marketmaker trying to earn the spread). I would say it is ARCA that has really innovated. They are getting 20-30% of their volume just from the routing feature. Simple idea, Nasdaq should have done the same thing (route out to other destinations), instead they tried to get all the ECNs into the fold and tax them .001. They left and took the liq with them. Also, no short-sale uptick rule on ARCA. That is a big advantage to trading there. I'll bet consolidation coming anyway, they were saying Nasdaq buying ARCA, but in a few more years it may be ARCA buying Nasdaq. Nothing against INCA/ISLD, ISLD is still the fastest of the fast, although my experience is SM is very fast as well.
Nasdaq and ARCA accept sub-pennies. ARCA allows it, and some may not have it built into the API they're using. That's certainly true of ARCA (innovation), their star is rising. However, INCA was the owner of the market, and after having been evicted they're coming back in a very strong way. Politically speaking, INCA has some very old and strong ties with Nasdaq, and the new management over there is getting real aggressive in getting back their market share. BTW, there is an up-tick rule on ARCA, it's not evident to the trader, because ARCAs order matching capability is much more efficient at getting the short sale off.
How is that? From ARCA's web site: Orders in NASDAQ stocks are not subject to the bid test as long as the order is matched in the ArcaEx Book*. Short Sales that are routed outside the ArcaEx book will be subject to the short sale rules of the away market. and (I think this only begun with the implentation of ARCAEx) Does the Archipelago Exchange accept sub-penny orders? The minimum price variation for quoting and entry of orders on the Archipelago Exchange is .01. On OTC orders sent to Archipelago in sub-penny increments the price will be truncated to the best price two decimal places.
I stand corrected. The firm I worked with just recently, had accepted sub-pennies via, ARCA with their institutional platform. I put a call into the CIO, and was told they lost the capability of a few weeks ago. I enjoy using subpennies on stocks in tight trading ranges, when I'm daytrading stocks.
why doesn't island start routing orders outside their ECN like ARCA then? Or is their technology too hard to change? is it possible in 5 years all the ECNs and Nasdaq will form 1 huge limit book? or is that just a pipe dream since the market makers will do everything in their power to keep their jobs?
With Supermontage - Nasdaq tried to get all the ECNs in, making in effect one big order book if you route to Nasdaq. SM was supposed to kill the ECNs. Didn't happen and now Nas is fighting just to stay competitive. The problem is that ARCA and INCA already had so much market share they didn't need to join SM. So, we have the "fragmentation". Good for scalping, as you will see the occasional crossed market, but if the SEC steps in they are going to want to eliminate that (locked/crosses being seen in general as a bad thing).
With one important difference: You don't lose anything but money if you get caught under the "bulldozer".