INTERVIEW
Faster, Cheaper, Better?
Matthew Andresen Of Island ECN
ILLUSTRATION BY CARL GREENMatthew Andresen has been serving as president of Island ECN, Inc., since 1998. Since then, Andresen has spearheaded Island's explosive growth and overseen its role in shaping the new electronic marketplace. His strategic mission at Island is to provide all market participants with the ability to execute transactions on a level playing field. That has meant building Island into the first marketplace to provide a free, real-time display of all its orders through the Island BookViewer, software that allows orders received by Island for display on the limit-order book to be immediately visible to anyone with a Web-based browser. With this, investors have unprecedented access into the marketplace. Under Andresen's leadership, Island has become the fastest, most efficient, and lowest-cost forum for trading equity securities. In 1999, Island's trading volume was over 26.5 billion shares, with a total dollar volume of $1.56 trillion. On an average day, Island trades approximately 200 million shares -- accounting for approximately 12% of Nasdaq's volume. Andresen has also overseen Island's extended-hours trading session, which has given the investor greater flexibility and access to the financial marketplace.
On June 28, 1999, Andresen launched Island upon one of its most significant challenges -- filing with the US Securities and Exchange Commission to become the first for-profit stock exchange in the US. With this, Andresen committed Island to delivering speed, efficiency, and prices to the market for NYSE-listed stocks.
Andresen was interviewed via telephone on February 17, 2000.
Let's start with the basics. What is this business, and how did you get into it?
Island was started about three years ago. Its mission sounded simple -- to match buyers and sellers of stocks electronically. Up to then, markets relied on human intermediaries. I am sure all of your readers are familiar with the commodity pits, or the New York Stock Exchange (NYSE), or any of these other traditional markets. What Island sought to do was create an alternative to that. Island wanted to create a place where we leveraged technology to allow things to happen much faster and for much less cost. But the most important thing that Island offers is a fundamentally fairer market. Anyone who has been on the trading floor or, for that matter, seen the floor on TV, knows that floor traders enjoy an enormous time and place advantage over everyone else. That advantage is the seed to profitability. What Island has sought to do was create an electronic marketplace where no one has an advantage over anybody else. Everybody gets all the information at the same time.
How's that different from Nasdaq? Nasdaq traders have used a computer network for years.
Nasdaq is not a central meeting place. I always equate them to a shopping mall.
Aren't you a member of the National Association of Securities Dealers (NASD)?
Yes. But think of Nasdaq as a shopping mall. In a mall, you might have a Macy's, and I know you would have a Starbucks. You might have a Sam Goody's. You would have, basically, a mall full of different stores. That's Nasdaq.
Just a shopping mall with different stores in it?
Right. Instead of Macy's or Starbucks, the stores in Nasdaq are Island, Instinet, Goldman Sachs, Morgan Stanley, and others.
Now, what is the mall, in this case Nasdaq, responsible for? Well, traditional shopping malls are responsible for policing the parking lot; providing a map at the entrance so you know where to go; keeping the temperature comfortable inside. Nasdaq is responsible for the same sorts of things. Specifically, Nasdaq has two functions. For one, it aggregates market information. So just like when you walk into a shopping mall, when you walk into Nasdaq, you can say, "I want to trade Intel or Microsoft. Where is the best price, and what is the best price?"
And they tell you.
They will tell you, "Island at 983/4." You thank them, and that's where you go. That's one thing they do. The other function -- the only other function they provide -- is allow you to interact with the information you requested. Just like when you walk into the mall, they always make sure you can get into all of the stores. So if you ask Nasdaq where the best place is to trade Microsoft and they tell you Island, Nasdaq lets you go to Island to trade Microsoft. They provide the connectivity mechanism for you to actually be able to transact with Island.
But not clearing.
Right. That's done by the National Securities Clearing Corp.
Island started out as a broker-dealer, didn't you?
We still are a broker-dealer.
In Nasdaq?
Yes. We are a member of the NASD, which owns Nasdaq. In fact, we are now 12% of Nasdaq. One out of every eight trades happens on Island. The Island difference, the advantage we have, is that we match the trades just like all these other different participants, but we do it faster every time, cheaper every time, and more fairly than has ever been done before.
How's that?
The traditional method is to have human intermediaries interact with the order; we simply match the trades electronically.
So they're sitting there with a guy who is actually at a desk and the guy says he wants to buy Microsoft and another guy looks at his inventory and says, "Okay, I've got some Microsoft I can sell you." Is that it?
You've got it. Our model is to do that match over a computer. In fact, we match more than 200 million shares a day with an off-the-shelf Dell computer.
That's one reason I think Island is better. Island does things in a fairer way.
How?
We match people directly. Just like when you go on eBay, you are buying something right from someone else. That's an advantage everyone understands. All eight and a half billion shares that traded on Island in fourth-quarter 1999 traded without a spread. In every single case, we had a retail investor meeting another retail investor, or maybe a professional, directly. There is none of that deadweight loss that you get in the traditional marketplace.
What Island has sought to do is create an electronic marketplace where no one has an advantage over anybody else. Everybody gets all the information at the same time. -- Matthew Andresen
Excerpted from an article originally published in the May 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.