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Market Makers and ECN's

This article is an abstract of the book:
The Complete Guide to Daytrading

Market Makers
Market Makers serve as intermediaries between buyers and sellers. They buy the stock at the Bid and sell it at the Ask. Each market maker is assigned a unique identifier composed of four alpha characters. If you open a market maker Box (Level II) you can only see the identifiers. So, if you open a Level II window for the stock Intel (symbol INTC) and you see GSCO at the Bid with 1,000 shares, you know that Goldman Sachs (GSCO) is willing to buy 1,000 shares of Intel Corp.

SuperSoes trading system maintained by the NASDAQ. It is an automatic non-negotiable execution and reporting system for orders up to 999.999 shares. The market maker is selling you his shares at the ask, and buying your shares at the bid. The advantage of using SuperSoes is that market makers are hit electronically, and thus this makes it very difficult for a market maker not to honor the quoted price and quantity. SuperSoes fills are very fast when market makers are available for a fill.

SelectNet is an electronic system maintained by the NASDAQ that was originally created for transactions between market makers. You can also use it to negotiate a trade with a market maker or to broadcast your order to all market makers. With SelectNet you can send orders at any price and any share size up to six figures. After execution, the transactions are automatically reported and show up in the Time & Sales window.

ECNs (Electronic Communication Networks)
ECNs are privately owned. They match limit orders and, unlike market makers, do not profit from a spread. Using ECNs, traders can execute trades without the help of a market maker. If someone wants to buy a stock at 50 and someone else wants to sell it at 50, both orders are matched within the ECN.

Until 1998, Instinet was the only ECN available. It is used by institutions and market makers trading anonymously. Instinet is still the largest ECN but it's losing ground more and more as other ECNs come into existence.

Instinet - also know as INCA; used by market makers and institutional investors to trade with each other.
Island - ISLD; one of most popular and fastest ECNs, allows the trader to essentially make a market in a particular stock by establishing bids and offers. It is an independent system and is accessible via direct preferencing.
Archipelago - TNTO - Terra Nova Trading: This ECN allows a trader to join market makers, who have quotes in the various tier pricing levels, in advertising an order on the Bid, Ask, or in between the spread.
B-Trade - BTRD - Bloomberg Tradebook LLC, Brokerage by B-Trade Services, a subsidiary of The Bank of New York Company, Inc.
RediBook - REDI - Spear, Leeds and Kellog
Attain - ATTN - All-Tech Investment. All-Tech's proprietary ATTAIN® ECN "ATTN" is a system by which subscribers (broker/dealers) can post bids and offers expressing their clients' trading interest in a particular over-the-counter security.
BRASS Utility - BRUT
NexTrade - NTRD
Strike Technologies - STRK

Every ECN has its own rules about how it handles order flow and execution. Some ECNs have higher liquidity than others, some are faster than others, some accept odd lots, others do not. Ideally, you should know the basics of each ECN so that you can choose the best one for your order routing. You should at least know the symbols of all the ECNs so that you don't mix them up with the market makers.

Read more about market makers and ECNs in the book The Complete Guide to Daytrading

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