Trade ECNs Slower than Specialists

May 27, 2005 ( - Equity market makers did a better job at trade execution that their fully electronic competitors, a trade execution study of more than 7,000 equity transactions has found.

The  three-month study also found that New York Stock Exchange (NYSE) specialists provided slower execution and filled fewer orders than their competitors, though not by the wide margin some might expect, according to the consulting firm Celent, MarketWatch reported. “The stunning thing was how slow ECNs (electronic communications networks) were,” study author Octavio Marenzi, told MarketWatch. “Specialists were surprisingly good.”

The study evaluated firms on issues including speed of trading, whether a trader gets the best price for a client, and whether a trade happens at all. Celent studied 220 billion shares in 7,213 equities traded between December 2004 and February 2005 using Securities and Exchange Commission (SEC) data.

The study found that Inet, the electronic marketplace of Instinet Group filled 36% of large market and marketable limit orders for the five most liquid NYSE stocks. Sixteen firms, including Citigroup, Bernard L. Madoff Investment Securities and E-Trade Financial Corp. scored higher.

Archipelago was the speediest in filling NYSE orders in the top 250 liquid stocks with an average time of 12.3 seconds. Specialists weren’t too far behind. LaBranche filled orders in 26.1 seconds and Van der Moolen filled them in 21.3 seconds the report said, according to MarketWatch. On the other end, among the slowest was E-Trade at 47.6 seconds while Automated Trading Desk, a market maker, turned in a time of 43.1 seconds.

When it came to the top 15 most liquid NYSE issues Citigroup’s market making unit turned in the fastest execution time 0.1 seconds. Fidelity Investments’ NFS market making unit was second with 0.2 seconds a trade. Markedly slower were Archipelago, 1.7 seconds, and NYSE specialists which turned in no time better than 6.7 seconds.

“For small orders for very liquid stocks, precisely the area where ECNs should excel, we found extraordinarily slow execution times,” Celent said, according to MarketWatch; “These speeds were so bad, in fact, that we felt compelled to verify the data in question.”

Morgan Stanley’s and Fidelity’s market making units were the fastest at filling small orders for the top five Nasdaq issues, averaging 0.1 seconds. At the bottom were ECNs: Inet, 20.2 seconds; Brut, 16 seconds, and Attain NOCI.