For Whom the Bell Tolls: The Demise of Exchange Trading Floors and the Growth of ECNs

By Markham, Jerry W.; Harty, Daniel J. | Journal of Corporation Law, Summer 2008 | Go to article overview

For Whom the Bell Tolls: The Demise of Exchange Trading Floors and the Growth of ECNs


Markham, Jerry W., Harty, Daniel J., Journal of Corporation Law


I. INTRODUCTION

II. EXCHANGE TRADING--SOME HISTORY

  A. Development of Stock Exchange Trading in the United States
  B. Development of Futures Trading on Exchange Floors
  C. The Regulatory Era
  D. Market Convergence
  E. The Role of the Exchange.

III. ELECTRONIC TRADING ARRIVES

  A. Automation Arrives in the Futures Industry
  B. Automation Arrives in the Securities Industry
  C. Scandals
  D. The ECNs Arrive
  E. Nasdaq and NYSE Responses

IV. REGULATING THE ECNS

  A. Securities industry
  B. Derivatives Industry

V. REGULATORY CHALLENGES--POST TRADING FLOOR

  A. Derivative Markets
  B. Securities Markets
  C. Regulatory Challenges
  D. ECNs: Pros and Cons
  E. Financial Market Fees
  F. Effects on Regulators

VI. CONCLUSION

I. INTRODUCTION

The colorful "open outcry" trading in the "pits" of the Chicago futures exchanges and the bell--ringing opening of trading on the floor of the New York Stock Exchange (NYSE) have long dominated the public perception of how those markets operate. Those exchanges are now in the midst of radical changes that will soon be erasing those images. Exchange trading floors are fast fading into history as the trading of stocks and derivative instruments moves to electronic communications networks (ECNs) that simply match trades by computers through algorithms. (1) Competition from ECNs has already forced the NYSE and the Chicago futures exchanges to demutualize, consolidate, and reduce the role of their trading floors, while expanding their own electronic execution facilities. (2)

The amazing growth of the ECNs and their displacement of the traditional exchanges have raised regulatory concerns. The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have been struggling with that issue for nearly a decade. The SEC's burdensome regulations are driving capital away from public markets such as the NYSE and Nasdaq and into ECNs, which are more lightly regulated. Many public companies are also opting out of the public markets by going private; institutional trading markets in unregistered securities are growing; and foreign issuers are rethinking the value of listing in regulated U.S. markets. The ECNs are also encouraging U.S. investors to invest abroad. As a result, the SEC and the CFTC are experiencing the effects of regulatory arbitrages as issuers and market participants flee the excessive regulation imposed in domestic markets.

The CFTC initially tried to prevent virtually all non--exchange trading of derivatives. It then did a volte--face and decided against regulating ECNs that provide execution services only to institutional investors. The CFTC believed those entities had the wherewithal and were sophisticated enough to protect themselves. However, as the result of a number of problems in the energy markets, the CFTC is reversing course once again and is now seeking to regulate those institutional markets in much the same way that it regulates exchanges that service retail investors.

This Article will describe the growth of the securities and commodity exchanges in the United States. It will show how their traditional trading floors became the center of market activity well into the last century, a dominance which was aided in no small measure by the monopoly positions allowed them by their regulators. The Article will trace the growth of electronic competition that undermined those monopolies and will describe the responses of the exchanges to those upstarts. The Article will then describe the regulatory challenges that these electronic markets are facing in an increasingly global economy and the responses of the CFTC and SEC to these developments. (3)

II. EXCHANGE TRADING--SOME HISTORY

A. Development of Stock Exchange Trading in the United States

Trading in stocks and commodities was first conducted in America through auctions that were the favored means for pricing goods of all descriptions in the colonial era. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

For Whom the Bell Tolls: The Demise of Exchange Trading Floors and the Growth of ECNs
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.