Man Vs. Machine: ECNs, ATS, HFTs—Who the Players Are

It's a much different world—more than just exchanges

There are nearly 50 venues where buyers and sellers can meet

In one sense, it's pretty simple. The trading world is divided into two groups: the customers (the buy side), and the people who take and execute the customers' orders (the sell side).

The Customers

1. Retail: People who trade online or have a brokerage account and interact with their brokers.


2. Asset Managers: Mutual funds or pension fund managers (public and private) who manage money on behalf of investors.

3. Professional Traders: Trading alone or with a firm, who trade for a living using their own money, their firm's money, or on behalf of high net worth individuals.

These include:

  • Hedge Funds, usually private investment parnerships open to only a small number of investors. Unlike mutual funds, they are mostly unregulated
  • Proprietary Trading Desks, where firms trade for direct gain, rather than commissions
  • High-Frequency Traders

The Trading Community

1. A Broker: An individual or firm that buys or sells stocks for its clients and charge a commission (this is known as agency trading). These include online brokers like ETrade, AmeriTrade, and discount brokerage firms like Scottrade and Charles Schwab.

2. Broker-Dealers: Brokers that can buy and sell stocks for clients (agency trading) but can also execute trades for their own accounts (principal trading). The largest broker-dealers are part of the big commercial banks: Bank of America/Merrill Lynch, Citigroup, Morgan Stanley, Goldman Sachs.

3. Market Makers: They quote prices to both buy and sell stocks and other securities. They make their money by profiting from the difference (the spread) between the buy and sell orders. While most broker-dealers have market-making operations for their own (principal) trading operations, there are only four or five large market making operations that do agency trading in any size, including Knight Capital, Citadel, UBS, and Citigroup.

4. Trading Venues: Trading has to happen somewhere, even if it occurs in a computer. Forty years ago, there was only one major exchange (NYSE) and the over-the-counter market.

Today, it's a much different world. There are more than just exchanges, there are other venues where buyers and sellers can meet.

The Exchanges

The Cash Equities Exchanges:

1.NYSE Euronext owns 3 exchanges: NYSE Classic, NYSE Arca, and NYSE AmEx.

2. NASDAQ OMX Group owns 3 exchanges: NASDAQ, Boston Stock Exchange (now called Nasdaq OMX BX) and the Philadelphia Stock Exchange (now called Nasdaq OMX PHLX).

3. BATS Exchange, which owns 2 exchanges, and is privately held by Wedbush, JP Morgan, Merrill Lynch, Tradebot, Credit Suisse, Deutsche Bank, Citigroup, Lime Brokerage, Morgan Stanley, the Lehman estate, GETCO, and a handful of employees through shares purchased and options.

4. Direct Edge, which has two exchanges and is owned by the International Securities Exchange, Knight Capital, Citadel, and Goldman Sachs, with a small interest held by JP Morgan and a few other firms.


5. The Chicago Stock Exchange.

6. The National Stock Exchange.

7. The CBOEStock Exchange.

Add it all up, there are now almost a dozen stock exchanges—and that's just the U.S. "The point is, we have a lot of different ways to execute (trades). It really depends on the order itself—is it big, is it liquid, what do we have to do?," says Gus Sauter, Chief Investment Officer at Vanguard, one of the country's largest mutual funds.

Why would anyone trade on one stock exchange over another? For some, it's a pricing arbitrage. For many, it also depends on who has the best bid and offer. Other factors also come into play, like ownership stake.

There are also several Futures Exchanges:

1. CME Group: owns NYMEX (commodity futures), CBOT (futures and options), and the CME (trades financial instruments like interest rates, equities, and currencies, as well as commodities and alternative investments like weather and real estate derivatives).

2. ICE Futures (formerly the New York Board of Trade), owned by the IntercontinentalExchange, which trades commodity futures.

3. NYSE/Liffe.

4. ELX, an all-electronic exchange owned by Bank of America, Barclays Capital, BGC Partners, Breakwater, Citi, Credit Suisse, Deutsche Bank Securities, GETCO, Goldman Sachs, JPMorgan, Morgan Stanley, PEAK6 and The Royal Bank of Scotland.

There are also many options exchanges, the largest of which is the CBOE, but also includes the ISE Options Exchange (the first fully electronic options exchange, owned by Eurex), the NASDAQ Options Market, and options markets owned by Arca, Amex, Boston, Philadelphia, and BATS.

Alternative Trading Systems (ATS)

These are different venues for trading stocks or securities off of exchanges or during times when exchanges are closed. The major ones are:

1. Electronic Communication Networks (ECNs), which are similar to exchanges but are not allowed to list stocks. There are only a few of these left: Bloomberg Tradebook, LavaFlow, and Track ECN (BATS and Direct Edge, now stock exchanges, were formerly ECNs).

2. Dark Pools or "Crossing Networks", where bids and offers for blocks of stock are matched anonymously. The largest ones are Credit Suisse (Crossfinder), Goldman Sachs (Sigma X), Knight Capital (Link), Getco Execution Services, Liquidnet, Level ATS, Posit (ITG), PIN (UBS), Pool (Morgan Stanley), Citigroup (Match).

3. Matching Networks, or "Internalization," which allows a firm to fill an order from that firm's own internal supply of stock.

4. Voice-Brokered Third-Party Matching: old-fashioned traders that match buy and sell orders directly.

In total, there are nearly 50 trading venues today.

All of these customers can interact in all of these venues—that's what makes trading so complicated.