A small Clearwater firm could become the only Florida-based stock exchange.
by Stacie Kress Booker
John Schaible and Mark Yegge, 30-something co-founders of Clearwater-based NexTrade, accomplished what many in the financial services industry thought impossible when they received approval from the Securities and Exchange Commission three years ago to become an electronic communications network (ECN).
An ECN, basically an eBay for stocks, brings buyers and sellers of stocks together online, charging a penny and a half per share for each transaction. NexTrade lists Dreyfus Brokerage Services and Brown & Co. as customers. Of the nine ECNs, NexTrade is one of the smallest and the only player outside the major financial centers of San Francisco, Chicago and Wall Street. "People told us it couldn't be done," says Yegge. "We were told 'no' about 4 billion times."
Schaible and Yegge now are trying to upgrade their ECN into an official stock exchange that would have the ability to trade listed stocks as well as over-the-counter shares, generating stock quotes and charging listing fees. NexTrade is revamping its trading systems to provide more information to investors and enhance its execution capabilities.
The move has big implications: While Nasdaq now considers ECNs such as NexTrade "family," it's an uneasy alliance. As an exchange, NexTrade will compete directly with Nasdaq.
NexTrade, however, may have little choice if it wants to grow. With a daily trading average of around 3 million shares, it's profitable but still small potatoes compared to Nasdaq, where about 2 billion shares a day change hands. It's even a lightweight compared to the two largest ECNs, Instinet and Island, which comprise about 11% to 15% of daily Nasdaq trading volume.
ECNs have captured 30% to 35% of Nasdaq share volume, but Dick Bove, director of financial institutions research at Raymond James, doesn't see much room to expand and doesn't think Wall Street will see any more ECN startups. Instead, he thinks, they'll consolidate and merge with each other. "ECNs have peaked in terms of market penetration," he says.
Market volatility isn't helping: If Nasdaq stays in its swoon, it's not likely ECNs will increase their share of overall trading.
What ECNs don't have, says Bove, is liquidity. They use their customers' capital to execute trades. In rapidly changing markets, the ability to provide liquidity can be crucial. For example, when the market is plunging, investors don't go to ECNs and wait for a potential buyer to get rid of their stock.
In addition, big-name Wall Street brokerages such as Goldman Sachs, Fleet Bank and others are co-opting the concept and buying up ECNs or starting their own, backed by their own huge capital resources. Independent ECNs such as NexTrade are left to find new ways to build business -- hence the move to become an exchange.
Schaible and Yegge think they can beat the odds again. And if the SEC signs off, Florida will have its first stock exchange. "It's not a question of if," says Yegge. "It's really a question of when." The SEC is expected to decide in 12 to 18 months.
In the News
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Providence, R.I.-based McGovern Noel & Benik has joined Holland & Knight's Providence office. McGovern Noel & Benik specializes in environmental issues as well as business, real estate, creditors' rights, commercial lending and healthcare. Tampa-based Holland & Knight is the nation's fifth-largest law firm, with more than 1,150 lawyers in the U.S.
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