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After-Hours Pioneers Test ECN Terrain

The ECNs have after-hours trading all to themselves, for now.

Gary Hoch has glimpsed the future of investing.

Hoch, a 37-year-old online investor based in Fort Lauderdale, Fla., logged on to

Datek Online's

after-hours trading for the first time last month, when the online brokerage started offering the session through


, an electronic communications network, or ECN. Datek Online's parent company also happens to own most of Island.

On July 20, after the market closed, Hoch sent Datek an order to buy 300 shares of a small telecom company at 36 5/16. And waited. Datek sent that limit order -- ECNs only take these orders to buy or sell at a certain price -- to Island. The system then electronically searched for a match, a sell order to offset the buy order.

If Hoch had wanted to, he could have watched as his order was compared with other orders placed with Island, which has an electronic list, or "book," that shows all the buy and sell orders in the system.

Analysts estimate that ECNs already handle 25% to 30% of


stock trading, and the push for after-hours trading is likely to win them even more ground.

ECNs are to individual investors what



has been to the auction market, according to one industry analyst. "It gets investors closer to other individuals who want to buy and trade securities," explains Jim Laird, a senior research analyst at the

Yankee Group


All the major online brokerages are racing to build links to ECNs. Datek has Island, and



bought a stake in the

Archipelago ECN

earlier this year.






Charles Schwab


announced recently that they would buy stakes in the

Spear Leeds RediBook ECN


Investors may soon be able to trade via ECNs not only after hours, but during the regular trading day, as well. Already, some small daytrading firms let their investors choose whether to execute trades on an ECN or through a traditional Nasdaq market maker, and E*Trade is considering doing the same.

Tony Houston, executive vice president at

Internet Financial Services

, the parent company of

AB Watley

, which runs both a Web-based trading service and a daytrading service, says ECNs can give traders an edge for quick trades on small price movements. For now, such access is available only via the specialized software that daytrading services use, but such capabilities should soon be available on the Web, too.

"Probably a year and a half down the road, as these ECNs proliferate and consolidate, you will have more firms starting to look that way," Houston says.

Not that ECNs are a cure-all for getting individual investors faster trades at better prices. Taking the broker out of the buying-and-selling process isn't as easy as it sounds. The broker's mandate is to provide the best trade execution possible for its customers, Laird points out, and that means deciding where orders should go. The big online brokers have not yet committed to the idea of letting traders choose their method of execution.

In fact, ECNs can be risky, says Laird. "There are dangers of being had, or doing something before one understands a market or understands trading. It's no different from haggling with somebody down on Fifth Avenue to buy a book."

For most investors, it's the ECNs' ability to facilitate after-hours trading that will have the most immediate impact.


Chairman and CEO Michael Sanderson says that in after-hours trading, individuals will be able to see even more deeply into the stock market than they do now. Like Island, Eclipse will show its entire book -- all of the buy and sell orders. The current Nasdaq structure only shows the best bid or offer of each market maker or ECN.

"Transparency brings the best price and that's easily done in an electronic system," Sanderson says. Eclipse is essentially an ECN that adds a human edge by putting traditional market makers into the system. "There will always be a price to sell and a price to buy," Sanderson says. Originally set to launch in mid-July, it now looks like Eclipse may not start until mid-September.

The problem with ECNs -- especially in after-hours trading -- is that you're never sure who's going to show up at the party. Critics warn of low liquidity and high volatility. Access to the ECN after hours hasn't done Hoch much good. He has tried to trade several times during the after-hours session, to no avail: There hasn't been anyone on the other side of his orders.