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The Third Market firms were providing anonymity for exchangebased trades and these institutions needed a way to preserve their anonymity in Nasdaq trades as well. Imagine the effect on the market if it was known that a major trader such as Peter Lynch or Warren Buffet was selling a particular stock. |
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To fill these needs, a new marketsoon called the Fourth Marketarose. It was pioneered in 1969 by a firm named Instinet. Instinet offered a computerized service for Nasdaq trades that displayed subscriber's bid and ask quotes, executed matches, and ensured anonymity in the transaction. |
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The Fourth Market has grown to become an important segment of the Nasdaq market; published estimates indicate that Instinet executes in excess of 25 percent of the entire Nasdaq share volume. |
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Let's get to the heart of the matter: the Third Market and the Fourth Market transformed the markets for the institutions. They gave the institutions lower transaction costs and the ability to remain anonymous as they carried out large market transactions. The result was what every trader dreams ofbetter returns. |
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This was the start of a powerful cycle. Better returns attracted more capital to the institutional players, which fed more liquidity into the markets, which supported and enhanced share prices, which increased the wealth of our nation, which created more funds to invest, which fed back into the institutions. The cycle has repeated endlessly for years. |
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Although most Americans have not even heard of the Third Market or the Fourth Market, they have had an important role in the creation of much of America's enduring wealth. |
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The Fifth Market is the first to bring important market changes for the benefit of the individual investor. The Fifth Market is a much more recent development, with the arrival of the first Electronic Communication Network (ECN) in 1996. |
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An ECN is defined by the NASD to be "any electronic system that widely disseminates to third parties orders entered . . . and permits such orders to be executed against in whole or in part." |
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The ECNs arose to provide their customers better liquidity and better price execution for Nasdaq stocks. In effect, they were offering the active individual trader many of the same advantages that the Third Market and Fourth Market brought to the institutional trader. |
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