Favored by the Security Exchange Commission, Electronics Communication Networks (ECNs) have grown as alternative trading systems that enable to bypass the markets makers on the stock markets and allow investors to directly compensate and execute their orders with more discretion and at a lower cost. In this paper we underline the fragile character of the current ECNs and question their competitive advantages through empirical evidences. We find a rationale for market makers and ECNs excessive spreads and overreactions. The use of network theory highlights notions of critical mass, open interface and alliances. Moreover, since competition between market makers and ECNs is based on volume, the emergence of ECNs has been mainly possible because of the growth of the American stock market. Furthermore, strategies of new ECNs are built on anticipated future growth. Should the market shrink, ECNs would rapidly be forced to merge and most of them would disappear.
['Eric Benhamou', 'Thomas Serval']
On the Competition Between ECNs, Stock Markets and Market Makers