| Electronic Communication Networks In China |
Article Index for Electronic Communication |
Website Links For Electronic |
Information AboutElectronic Communication Networks In China |
|
ELECTRONIC COMMUNICATIONS NETWORKS (ECNs) as they are popularly known are well-established trading platforms in the United States (USA). A New York Times article reports that electronic trading is one in four transactions made by individual investors in USA. The goal of ECN’s is to cut out intermediaries between buyers and sellers in stock transactions. “Today, ECNs account for approximately 30% of total share volume and 40% of the dollar volume traded in Nasdaq securities. ECNs account for approximately 3% of total share and dollar volume in listed securities.4 In contrast, in 1993, ECNs accounted for only 13% of share volume in Nasdaq securities and only 1.4% of listed share volume.” (SEC Report, 2005, op. cit. 1.) Instinet, a Reuter subsidiary and a network established in 1969 to allow mutual funds and other institutional investors to post orders anonymously at prices inside the wide spreads remains the biggest ECN. It trades in more than 40 stock markets including the NYSE. Most ECNs like Instinet are for institutional customers only. However, The Island and Archipelago, owned by Datek Holdings, an online trading firm accept trades from small investors. The Archipelago system allows an order to leave the network once it is determined that nobody is willing to take the opposite position and get posted onto the NASDAQ marketplace. The one bottleneck that hinders efficient performance of ECNs is volume. Given volatility of NASDAQ scrips it is important that an ECN quickly match orders lest the market move away from the requested price. “The information technology revolution has provided investors with new execution choices. Of special note are the recent growth of alternative trading systems known as Electronic Communications Networks ("ECNs") and the increased opportunities for trading in the after-hours market” (SEC report, 2005, op. cit. 1.). ECNs emerged following a change in the NASDAQ market rules resulting through a SEC investigation in 1995 that required market-makers to provide postings on their trading systems for customer orders that fell between bid and ask prices. The SEC 1996 report revealed that investor orders between bid and ask were rarely displayed and investors had a tough time meeting each other without the interference of a market maker and paid excessively for this service. In contrast, NYSE met investor bids 90% of the times without trader intervention. ECNs arose to help generate efficiencies and disintermediate traders. ECNs allow individuals to take positions and help identify other investors that take the opposite stand. REVENUE STRUCTURE · Archipelago earns commission of 1.5 to 2.5 cents per share when two customers orders are matched. For matches to the tune of 75 million shares a month earnings are between $375,000 to 1.8 million per month · Additional revenue streams are through charges levied on Internet customers and day traders that are around $7 per trade THE DIGITAL MARKETMAKERS “Instinet: Reuters' system for institutions; long dominant, but under pressure from aggressive upstarts. Fee: up to 1.5 cents per share for brokers. The Island: Originally championed by SOES bandits; big factor in Web brokerage Datek Online's speed. Fee: $1 per trade execution. Bloomberg Tradebook (B-Trade): Bloomberg's effort in the burgeoning ECN market; 100,000-terminal potential. Fee: up to 1.5 cents per share for brokers. Archipelago: Also known as Terra Nova, being used via handheld portables by options traders. Fee: up to 3 cents per share. Rating & Execution Dot Interface Book (RediBook): NYSE specialist firm Spear, Leeds &Kellogg's system: designed for institutions. Fee: not available. Attain: Latest entry in the ECN market from electronic day-trading firm All-Tech Investment Group. Fee: up to 1.5 cents per share.” (Forbes, April 6, 1998) The digital economy heralds an end to fixed pricing and sticky prices. It is the harbinger of flex pricing (Coke’s “smart” vending machines changing prices on the fly, Business Week, May 4, 1998) that provides instantaneous response to changing demand conditions, consumer preferences and firm specific needs. Post hoc explanations abound which argue that flex pricing is the logical outcome from wiring our economy and building corporate networks. As firms and consumers react to ubiquitous and easily accessible information, pricing is increasingly commoditized. With consumers being able to efficiently discount available information during complex decision-making, firms have little recourse except flex pricing to maximize profit taking. Furthermore, as digital markets evolve and become efficient, arbitrage opportunities become transient and harder to identify. In response to these changing business dynamics a new breed of firms have arisen. These firms are making a play to build markets and develop trading opportunities around products that would never have been considered tradable commodities in the past i.e., bandwidth and telephony minutes. Firms such as Band-X, RateXchange and ArbiNet are positioning themselves to profit from reallocation of excess capacities that carriers such as AT&T & MCI have built. For instance, AT&T’s infrastructure is built to carry peak capacity loads and on a day-to-day basis is utilized at only 20% of total capacity. The excess capacity becomes a commodity seeking a market. Enter these new mercantile exchanges and trading of bandwidth and telephony minutes becomes a reality. The major hurdle preventing these mercantile exchanges from emerging earlier was an inability to deliver the products. The Internet brings into play new technologies that make all this possible. The one weakness in this model is the relative costs of owning and renting fiber. As William Schrader of PSINet put it, “Economics 101 says buy fiber, because the cost of owning fiber today is one-tenth the cost of renting it.” This suggests that firms will choose to build high bandwidth fiber networks as opposed to renting it. Firms such as Qwest, Level 3, IXC Communications among others are trying to build their own fiber networks. The outcome, a bandwidth glut that deflates prices and margins for arbitrageurs. Ultimately, the beneficiary of this glut is the average consumer. This is one of the many opportunities that highlight different ways the Internet is impacting business. The business model for creating commodity markets around products and services can be potentially extended to include RAM, CPUs, airline tickets etc. Jay Walker, CEO, Walker Digital, has a patent on a business process for selling options on airline seats. The option allows you to lock in a low airfare, without tying up money or risking loss of ticket if travel plans change. The Internet is best known as a catalyst for dis-intermediation. A different reality that the Internet is facilitating is the birth of a new type of intermediary, a market maker that identifies and sources novel arbitrage opportunities through commodification of different Internet attributes. These commodities possess value that is not subject to rapid obsolescence and for which there is excess capacity and demand. The emergence of such market makers is the next evolutionary leap for the digital economy. CREATING A COMMODITIES MARKET IN CHINA CASE STUDY: SHANGHAI DIAMOND EXCHANGE Will market realities, efficiencies and volumes create ECNs in China? Presently in China, diamonds must enter the country through the Shanghai Diamond Exchange. Diamonds are increasingly treated as commodities in the United States and traded as such by most major players including manufacturers. The Shanghai Exchange is a centralized and efficient system for trading diamonds in China, albeit State Owned. A group of businessmen from Guangzhou tried to set up a parallel exchange but have been stopped by the Central government. China also cautioned diamond merchants from India against joining the illegal diamond exchange that was coming up in Gaungzhou, the largest city in South China. Organizers of this new exchange visited India and tried to persuade merchants to become its members. This group of Chinese businessmen are trying to set up a parallel and privately-run trading center for diamonds in Gaungzhou, in order to meet the needs of jewelry makers who produced jewelry for imports. The position of the Chinese Central Governemnet suggests that China will closely monitor the emergence of such privately run ECNs and if necessary, close them if they are perceived to function at cross-purposes with the Central government’s policies. CONCLUSIONS It is still early in China’s transition to clearly forecast whether privately run ECNs will evolve or not in China. WORKS CITED 1. {Link without Title} 2. {Link without Title} 3. {Link without Title} 4. {Link without Title} 5. {Link without Title} |
|
|