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Home > Report Information
REDIBook ECN: Poised for Growth
TowerGroup
February 1, 2000
9 Pages - Pub ID: TWR375909
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Countries covered: United States
As the ECN marketplace continues to fragment and the evolution of a central limit order book (CLOB) looms, the future of ECNs seems precarious. TowerGroup anticipates that only the top ECNs that currently control the market have the potential to succeed. One exception, however, is REDIBook. In 1999, REDIBook's monthly order flow increased by a dramatic 174% from 120 million shares in January to 569 million in December.
REDIBook, originally developed by Spear, Leeds & Kellogg, is gaining market share rapidly. REDIBook's ownership structure and business model place the ECN in position to capture a significant share of retail order flow. This Research Note examines REDIBook's business strategy. The Note also discusses REDIBook's features and functions, technology architecture, and future challenges.
Additional Information
Highlights
Electronic communication networks (ECNs) continue to emerge and proliferate throughout the securities and investments industry. Currently, trades executed on ECNs account for approximately 30% of all Nasdaq share volume. As investors continue to seek alternative trading systems (ATSs) in order to execute trades at lowest possible costs, ECN volumes are expected to increase steadily.
Strategic relationships between ECNs and financial services firms have quickly emerged in recent months. Firms seem to be racing to ally with ECNs—often multiple ECNs simultaneously. Perhaps the most powerful partnership to date is the ownership of REDIBook. The four initial owners of REDIBook are Spear, Leeds & Kellogg (SLK); Charles Schwab; Fidelity; and Donaldson, Lufkin & Jenrette. These four firms maintain ownership, management, and operation of REDIBook.
Currently, REDIBook receives order flow from the after-hours trading market of Schwab, SLK, Fidelity, TD Waterhouse, and DLJDirect. In addition, REDIBook receives order flow from traders accessing markets via SelectNet as well as existing clients of SLK’s REDI products.
Due to its ownership structure, REDIBook’s potential for future growth is tremendous. In December 1999, the four initial owners collectively averaged approximately 673 million shares per day on the Nasdaq market. In that same month, REDIBook’s daily share volume was 58 million, only 8.6% of the owners’ daily volume. These firms will never send all their order flow through REDIBook, but TowerGroup expects that the portion they do send will increase greatly in 2000.
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