When it comes to trading the most popular stocks on the


, the biggest middleman is no middleman at all.

Instead, that role is increasingly being filled by so-called electronic communication networks that match buyers with sellers, often securing a better price for both. ECNs are making life tough for

market makers, who make their living by profiting on the spread between stocks' bid and asked prices. ECNs eschew the spread, charging a fee that's usually about a quarter of a penny per share traded.

Last year, about 28% of all Nasdaq trades went through ECNs. This year, the networks have continued to grow in importance, with huge volumes of technology stocks moving through ECNs. More and more retail investors are trading online, adding to the volatility of some of these issues, especially the Internet stocks. Fast-expanding day-trading firms, for instance, often direct orders to ECNs.

"The Internet stocks are driving trading in ECNs," says Larry Tabb, a director with the

Tower Group

consulting firm. So far, ECNs have stuck to Nasdaq stocks, but Tabb says in the future they might start connecting to the

New York Stock Exchange

as well. An NYSE official didn't return two calls seeking comment.


(AMZN) - Get Report

, long a focus of Internet attention, is a case in point. In January, 316 million shares moved as the price slid from a split-adjusted 185 to 106. But the ECNs accounted for 79 million shares, or 25% of total trading volume. The fever hadn't hit a year ago: In January 1998, a paltry 583,000 shares, or 6.2% of total volume, went through ECNs.

Quite a difference. The ECNs are now seeing rising volumes of top technology companies such as





(DELL) - Get Report




. In January, 27% of trading volume in Yahoo! and 20% of volume in Lycos went through ECNs.

No wonder Wall Street's old guard is interested in ECNs'


Goldman Sachs

recently bought a stake in the ECN


, while

Morgan Stanley Dean Witter


owns a piece of another ECN,



The dominant force among ECNs is the

Island ECN

, owned by the online brokerage


. In January, the Island moved 864 million shares. In fact, more shares of Yahoo!, Amazon and



traded through the Island ECN than through any other intermediary. Matt Andresen, president of the Island, says ECNs are here to stay because they make trading more efficient. "We are a tool for brokerage firms," he says.

Craig Johnson, principal with tech consulting firm

Pita Group

and an avid day trader, is attracted to Datek because he believes running orders through the Island improves his prospects of securing a better price. "I plan to move some of my money over there and test the waters" once the company reinstalls its checking-account service, he says.

Some players expect trading volumes on the ECNs to fall once the bull market slows down. "If this market cools down, there will be less day trading and less usage of ECNs," says Bernard Madoff, head of

Bernard L. Madoff

, a major market maker in New York. Things certainly couldn't get much more frantic. "Some of these people are in and out of these stocks a dozen times in a day. This momentum-type trading increases the volatility," he says. Madoff's firm now refuses to deal in volatile Internet stocks, except for

America Online






"I think they're very transitional," adds Bill Singer, a New York attorney. Profits are tough to come by, he says, especially since certain market markers are refusing to pay their fees to ECNs. Singer's firm is suing a market maker on behalf of an ECN, complaining of unpaid fees; his firm represents several types of securities firms.

But some ECNs have bigger ambitions -- namely to become exchanges. To develop lasting power and cut the fees it pays to the Nasdaq, the Island plans to petition federal regulators this spring to become a self-regulated stock exchange itself. Both NYSE and Nasdaq should watch out.