Division of Market Regulation Issues Report on “Electronic Communication Networks and After-Hours Trading”

The staff of the
Division of Market Regulation has issued a report entitled
“Electronic Communication Networks and After-Hours Trading.”
Text of the report is available on the Commission’s website
at http://www.sec.gov/news/studies/ecnafter.htm.
     
     The information technology revolution has provided
investors with new ways to trade securities.  Of special
note are the recent growth of alternative trading systems
known as electronic communications networks (“ECNs”) and the
increased opportunities for trading in the after-hours
market.
     
     Pursuant to a Congressional request, the staff has
prepared a report analyzing the current operations of ECNs
and after-hours trading, their impact on the securities
markets, and recent regulatory initiatives that have been
taken to address these developments. The report discusses
the types of market participants that subscribe to ECN
services, as well as the benefits that ECNs provide to
subscribers and the market as a whole. The report also
addresses Commission initiatives, such as the order handling
rules and Regulation ATS, which have served to more fully
integrate ECN activities into the national market system.
In addition, the report outlines some recent developments
involving ECNs.
     
     The second part of the report analyzes current trading
dynamics in the after-hours market. In particular, the
report finds that after-hours trading volume remains
relatively small, with most of this activity concentrated
during the period immediately following the 4:00 p.m.
regular session close.  The report also highlights the
liquidity constraints and price volatility that investors
continue to face in this market and outlines recent
initiatives to improve transparency and extend essential
investor protection and market integrity measures to this
environment.  The report concludes with a discussion of the
issues that would need to be addressed if the major markets
decide to offer their own after-hours sessions.
     
     Overall, the report indicates that over the last few
years both the established markets and ECNs have sought to
provide innovative mechanisms to meet investor demands for
greater flexibility in the timing of their trades and in
their trading venues. The Commission remains strongly
committed to working with the self-regulatory organizations
and the securities industry to ensure that the regulatory
structure, particularly in the areas of investor protection
and market integrity, keeps pace with this rapidly changing
environment.