Citigroup to launch electronic trading network in US

NEW YORK - Citigroup, the largest US bank, said today it was launching its own electronic stock-trading network, a move that could potentially divert trading volume away from the New York Stock Exchange and Nasdaq Stock Market.

Another electronic communications network (ECN), called BATS, is also gearing up for a launch. BATS, partly owned by the founder of proprietary trading house Tradebot Systems, said earlier that it planned to launch on January 25, pending regulatory approval.

The move to launch new trading platforms comes as big brokerage firms try to protect themselves in case stock exchanges -- most of whom are converting from member-owned organisations into publicly traded, for-profit companies -- try to raise the cost of trading.

Bill Cline, Head of Global Capital Markets at consulting firm Accenture Ltd said the moves showed the industry wanting "somewhat of a hedge should the two dominant cash exchanges introduce very large fee increases or restrictive policies."

There has been a bout of consolidation in the market that has strengthened the hands of the dominant players -- Nasdaq and the NYSE. Nasdaq bought the Brut and Inet ECNs and the Big Board is buying Archipelago Holdings Inc.

That prompted Wall Street firms, including Citigroup, last year to purchase stakes in the Philadelphia Stock Exchange and an electronic venture run by the Boston Stock Exchange.

"New York and Nasdaq are now pretty conspicuously for-profit organisations and are no longer clubs -- so that may mean that Citigroup may not get the same thing out of an exchange that it once did," said Jamie Selway, managing director at White Cap Trading.

Another catalyst is the sweeping new US stock market trading and pricing rules, known as Reg NMS, scheduled to go into effect in June.

The SEC voted to adopt Reg NMS in April 2005 amid intense debate over the order protection rule, which bars traders from ignoring the best price for a stock when executing a buy or sell order, as long as the price is available on a fast, automated market.

That has put pressure on manual markets to introduce automated trading and the NYSE is in the process of building a "hybrid" market that combines floor trading with electronic. Industry experts see this as opening up the share of NYSE listed stock to greater competition.

"Reg NMS has made it necessary for the exchanges to go with a fully automated system," said David Easthope, analyst at Celent.

"The NYSE will straddle things with the hybrid model, but full automation is where we are heading."

Easthope added that there was "room for alternatives to the Nasdaq and the NYSE and the market should welcome alternative players."

Joe Ratterman, chief operating officer of BATS, said the launch of BATS was facilitated by NMS, but was driven by "over consolidation in the marketplace."

He added that "there needs to be more competition in the market besides Nasdaq and the NYSE."

BATS (which stands for "Better Alternative Trading System") is part owned by Dave Cummings, who founded TradeBot Systems and part owned by private equity firm Wedbush and electronic trading company GETCO Holding Company.

Citi's venture follows the bank's cash acquisition last week of OnTrade Inc, an electronic communications network that had been operated by closely held NexTrade Holdings Inc of Clearwater, Florida.

Citi said OnTrade will operate in its current state, while Citigroup performs certain technology enhancements, which it expects to complete in the second quarter.

ECNs emerged in the bull market of the late 1990s, snatching share of Nasdaq trading volume. The catalyst to their rise was a change in order handling regulations that went into effect in 1997, which effectively opened Nasdaq to greater competition.

- REUTERS