CHAPTER 1: ELECTRONIC COMMERCE AND THE ORGANEZATION OF FINANCIAL MARKETS 1
1.1 The Internet and the Digital Revolution 2
1.2 Financial Markets in the 21st Century:Functions and Institutions 4
1.2.1 A Functional Analysis 4
1.2.2 Institutions 6
1.3 Dis-intermediation or Re-intermediation? 8
1.4 Value Chain Model 10
1.5 Reinventing the New Value Chain 12
1.5.1 Customers Take Control 12
1.5.2 Understanding Customers Value Chain 13
1.5.3 Digitizing the Value Chain 14
1.5.4 Creating a Value Web 15
1.5.5 Acquiring a Critical Mass 16
1.5.6 Mass Customization 18
1.6 Financial Supermarkets 19
1.6.1 E?Trade 19
1.6.2 Citigroup 22
1.7 Threats to Organized Exchanges 25
1.8 Summary 27
CHAPTER 2: ONLINE REVOLUTION 29
2.1 Online Brokers and Online Trading 30
2.1.1 The Traditional Stock Broker 30
2.1.2 Internet Technology and Brokerage Services 31
2.1.3 Real-Time Access and Lower Fees 31
2.1.4 Convergence of the Traditional and the New 33
2.2 Online Financial Information 35
2.2.1 The Race to e-Inform 35
2.2.2 Information and Market Democracy 36
2.2.3 Methods for Sharing Financial Information 39
2.2.4 Buying and Selling Financial Information Online 40
2.2.5 Demystifying Finance 44
2.3 The Changing Business Model 48
2.3.1 From Trading to Full Services 48
2.3.3 Search for Other Income Sources 49
2.3.2 From Broker to Personal Intelligent Agent 49
2.3.4 Intermediaries as Facilitators 51
2.4 Online Banking and Other Online Services 52
2.4.1 Banking and Payment Services 53
2.4.2 Asset Management:Everyone s Business 54
2.4.3 Competing Online for Assets 54
2.4.4 Online Insurance 55
2.5 Summary 57
CHAPTER 3: TOWARD A DIGITAL MARKETPLACE 59
3.1 Investment Styles 60
3.1.1 Direct Investing in Stocks 60
3.1.2 Indirect Investing in Mutual Funds 61
3.2 Market Imperfections 62
3.2.1 Traditional Initial Public Offering Process 63
3.2.2 Order Routing 64
3.2.3 Clearing and Settlement 64
3.2.4 Trading on the Exchange Floor 65
3.2.5 Outdated Accounting Conventions 66
3.2.6 Asset-by-Asset Trading and Execution 67
3.3 Internet IPOs 69
3.3.1 Pricing and Distributing an IPO 69
3.3.2 New Kids on the IPO Block 70
3.3.3 IPOs and the Dutch Auction Process 71
3.3.4 The Case of Ravenswood Winery 73
3.3.5 Potential Problems 73
3.3.6 Will Online IPOs Do Away with Underwriters? 74
3.3.7 Future Prospects for Online IPOs 76
3.4 Direct Trading and Real-Time Settlement System 78
3.4.1 Digital Identification 78
3.4.2 Electronic Payment System 83
3.4.3 Digital Transaction System 85
3.5 Summary 87
CHAPTER 4: FINANCIAL MARKETS IN A NUTSHELL 89
4.1 Auction Markets 90
4.1.1 Double Auction 91
4.1.2 Continuous and Periodic Trading 94
4.2.1 Bid-Ask Spread and Dealer Cost 96
4.2 Dealer Markets 96
4.2.2 Dealer versus Auction Markets 97
4.3 Transaction Costs 98
4.4 Market Liquidity 98
4.4.1 The Importance of Liquidity 99
4.4.2 Risk and Return in Providing Liquidity 100
4.4.3 Trends among Liquidity Providers 101
4.5.1 Agency Problems 103
4.5 The Needs of Institutional Investors 103
4.5.2 Illiquid Markets 104
4.5.3 The Upstairs Market 106
4.6 Liquidity Suppliers in a Digital Marketplace 108
4.7 Technology and the Evolution of Markets 111
4.8 Summary 113
CHAPTER 5: NEW YORK STOCK EXCHANGE 115
5.1 Market Organization 116
5.1.1 NYSE Membership 116
5.1.2 Trading Process 118
5.1.3 Order Book 120
5.1.4 Competing to Trade 121
5.1.5 Continuous Trading and Call Auctions 121
5.2 Technology and the NYSE Market Structure 123
5.2.1 Pre-and Post-Trade Technology 124
5.2.2 SuperDOT and the Specialist 125
5.3 Structural Weakness 126
5.3.1 A Labor-Intensive Process 127
5.3.3 Broker Fraud 128
5.3.2 Resistance to Technology 128
5.4 Responding to Competitive Pressures 132
5.4.1 Network NYSE 133
5.4.2 Institutional Express Order 134
5.4.3 NYSE Direct+ 136
5.4.4 OpenBook 138
5.4.5 MarkeTrac 139
5.4.6 A 24-Hour Market 140
5.4.8 Competing with Nasdaq 142
5.4.7 Experimenting with After-Hours Trading 142
5.5 NYSE as a For-Profit Company 145
5.5.1 Theory of Cashing-in 146
5.5.2 Everyone Else is Doing It 146
5.5.3 De-Mutualization and Balanced Focus 146
5.5.4 Money to Buy Others 147
5.5.5 A For-Profit Self-Regulating Business 147
5.6 Summary 149
CHAPTER 6: NASDAQ MARKET 151
6.1 Overview 152
6.1.1 Background Information 152
6.1.2 Legacy Issue 154
6.1.3 Quote-Driven Market 154
6.1.4 Market Makers 156
6.1.5 Market Opening 158
6.2 Role of Technology 159
6.2.1 SelectNet 159
6.2.2 SOES 160
6.2.3 SuperSoes 163
6.2.4 OptiMark Experiment 164
6.3 Collusion among Market Makers 165
6.3.1 Why No Odd-Eighth Quotes? 165
6.3.2 Monitoring and Punishing 165
6.3.3 Wider Spreads and Time Preference 167
6.4 New Regulations 167
6.4.1 Order Handling Rules 168
6.4.2 Lower Liquidity,Improved Transparency 169
6.5.1 Online Investors 170
6.5 Recent Developments 170
6.5.2 Breakdowns in SelectNet 171
6.5.3 Greater Volatility 172
6.5.4 IPOs and Market Volatility 172
6.5.5 Inefficient Market Opening Procedures 173
6.5.6 Nasdaq-AMEX Merger 174
6.5.7 Nasdaq s Web-Based Services 175
6.5.8 Decimalization 175
6.5.9 A Nasdaq IPO 176
6.6 Plans for the Future—SuperMontage 177
6.6.1 Quotes and Orders 178
6.6.2 Collecting Quotes and Orders 178
6.6.3 Displaying Quotes 179
6.6.4 Execution Services 181
6.6.5 Price-Time Priority Rules 183
6.6.6 Reactions 185
6.7 Summary 190
CHAPTER 7: ELECTRONIC COMMUNICATIONS NETWORK 191
7.1 Overview of ECNs 192
7.2 ECNs Impact 195
7.3 Who Are Some of These ECNs? 197
7.3.1 Instinet 197
7.3.2 Archipelago 203
7.3.3 Island 204
7.3.4 NexTrade 204
7.3.5 Brut 204
7.3.6 Bloomberg Tradebook 206
7.4.1 ECNs and Brokerage Firms 207
7.4 Changing Landscape of Equity Markets 207
7.4.2 Dealer-Friendly ECNs 209
7.4.3 Market Fragmentation 210
7.4.4 Do ECNs Make Any Money? 211
7.4.5 Do ECNs Have a Future? 212
7.4.6 ECNs as Exchanges 213
7.5 Crossing Networks 215
7.5.1 Crossing Explained 216
7.5.2 POSIT 216
7.5.3 Evaluating Crossing Networks 218
7.6 Summary 220
CHAPTER 8: COMPUTERIZED AUTOMATED TRADING SYSTEMS 221
8.1 Arizona Stock Exchange 222
8.1.1 Trading Mechanism 222
8.1.2 Competing for Order Flow 224
8.2 OptiMark System 224
8.2.1 Multidimensional Trading 225
8.2.2 Matching Algorithm 228
8.2.3 A Credible Promise 229
8.2.4 Competing to Trade 229
8.3 Primex 231
8.3.1 Alliance with Nasdaq 231
8.3.2 Replicating Floor Trading:Price Improvement 231
8.3.3 Challenges 232
8.4 Bundle Trading 233
8.5 Summary 237
CHAPTER 9: OVERSEAS FINANCIAL MARKETS 239
9.1 Development of a Pan-European Stock Market 240
9.1.1 Euronext 240
9.1.2 Ups and Downs of iX 242
9.1.3 Global Equity Market 242
9.1.4 You Ain t Seen Nothing Yet 242
9.2 OM Group 243
9.2.1 Computerized Equity Trading System:SAX 244
9.2.2 SOX:The Automated Bond Trading System 245
9.2.3 OM CLICK Exchange System 246
9.2.4 Trading in Euros 248
9.2.5 Nordic Exchange 249
9.2.6 Jiway 251
9.3 Swiss Exchange 251
9.3.1 Innovations in the 1990s 252
9.3.2 Market Design 252
9.3.3 Electronic Trading and Settlement System 253
9.4.2 Products and Trading 255
9.4.1 Market Organization 255
9.4 Eurex 255
9.4.3 Clearing and Settlement 256
9.5 Easdaq 257
9.5.1 Market Organization 257
9.5.2 Trading and Settlement 259
9.5.3 Nasdaq Europe 259
9.6 Australian Stock Exchange 260
9.6.1 Demutualization 260
9.6.2 Electronic Trading and Settlement 261
9.7 Summary 262
CHAPTER 10: FIXED-INCOME MARKETS 263
10.1 U.S. Treasury Securities Market 264
10.2 Corporate Bond Markets 266
10.3 Municipal Bond Markets 267
10.4 Advances in Information Dissemination 267
10.4.1 GovPx 268
10.4.2 FIPS 268
10.5 Electronic Bond Markets 269
10.5.1 Single-Dealer Systems 269
10.5.2 MultiDealer Exchange Markets 270
10.5.3 Interdealer Systems 275
10.5.4 Market Design and Market Success 275
10.6 Summary 277
CHAPTER 11: UNCONVENTIONAL FINANCIAL MARKETS 279
11.1 Electricity Markets 280
11.1.1 Deregulation of the Electricity Market 281
11.1.3 California Power Exchange 284
11.1.2 California Electricity Market Structure 284
11.1.4 What Went Wrong in California? 285
11.1.5 Trading Energy Futures and Options at CBOT 286
11.2 Catastrophe Insurance Markets 287
11.2.1 Insurance and Reinsurance 287
11.2.2 Securitizing Insurance Risk 288
11.2.3 Cat Bonds 288
11.2.4 CBOT Cat Options 289
11.2.5 CATEX 292
11.3 Iowa Electronic Market 295
11.3.1 Market Instruments and Payoffs 297
11.3.2 Market Format 298
11.3.3 Market Performance 299
11.4 Hollywood Stock Exchange 299
11.4.1 MovieStocks,StarBonds,and Options 300
11.4.2 Market Information 302
11.4.3 The Future 303
11.5 Summary 304
CHAPTER 12: EMERGING TECHNOLOGIES FOR ELECTRONIC MARKETS 305
12.1 Electronic Trading Networks 306
12.2 Internet-Based Development Tools 308
12.2.1 HTML and CGI 308
12.2.2 CORBA 311
12.2.3 Java 313
12.2.4 Java and the WWW 316
12.2.5 RMI and IIOP 319
12.2.6 ASP and JSP 320
12.2.7 XML 321
12.3 Secure Transactions 323
12.3.1 Internet Security Issues 323
12.3.2 Basic Cryptographic Techniques 324
12.3.3 Secure Socket Layer 324
12.4 Distributed Computing and Financial Trading Systems 325
12.4.1 ATM:Example of a Distributed System 326
12.4.2 Characteristics of a Distributed Computing System 327
12.4.3 Financial Trading Systems 329
12.4.4 A Component-Based Trading System Architecture 331
12.5 Concurrent Processing and Synchronization 335
12.5.1 Concurrent Processing 335
12.5.2 Threads 335
12.5.3 Synchronization 337
12.6 Synchronous Communication 338
12.7 Fault Tolerance 339
12.8 Summary 342
13.1 Barriers to a Frictionless Marketplace 343
CHAPTER 13: CREATIVE DESTRUCTION 343
13.2 Impact of Technology 345
13.3 New Problems and Threats 347
13.3.1 Online Fraud 347
13.3.2 Computer Glitches 350
13.3.3 Market Fragmentation 351
13.4 Process of Creative Destruction 351
13.5 Summary 353
Notes 354
Index 361