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In addition to building a fast, reliable electronic auction, Island focused on daytraders and the first wave of Internet investors, a market unserved by the only other ECN in the business at the time, Instinet. Instinet is a year-old Reuters subsidiary catering to institutional investors trading big blocks of stock.

By grabbing a market segment that Nasdaq broker-dealers served only grudgingly and by charging next to nothing for trading on its system, Island gained an early edge against Instinet and newer competitors. The result: Every day, the upstart ECN handles an average of million shares worth billions of dollars, about 10 percent of Nasdaq's daily volume.

Island appears to be on the verge of surpassing Instinet's market share, and it's the dominant player among a pack of ECN startups some backed by big Wall Street money that have popped up over the last few years. Island's origins date back to , when Jeffrey Adam Citron, then 17 and fresh out of high school, met Josh Levine, a year-old college dropout. They bumped into each other at Datek Securities, a small brokerage firm, where Citron was a low-level clerk and Levine was a casual contract worker. Citron's goal was to make pots of money the old-fashioned way - trading.

Levine was a talented programmer who wound up in a brokerage firm "pretty much by accident. Neither man likes to talk about himself. In an interview at the Broad Street offices, Citron, looking every bit the CEO in a charcoal gray suit, hurries past the pre-mogul phase of his life "all the mundane stuff" and starts his tale in , when he had already amassed a big bank account and was working on Island. Levine agreed only to be interviewed by email, providing minute details that were heavier on info than insight - every residence during his youth, a catalog of friends "age no friends" , the location of his parents "my Mom is buried at New Monefiore Cemetery, a few exits out on the Long Island Expressway".

What emerges is a picture of two ordinary-seeming young guys who somehow added up to one very big idea. Citron grew up in the New Springville section of Staten Island, home to the largest shopping mall in New York's five boroughs. After graduating from Port Richmond High School - a rough and academically sluggish place where he took advanced math classes and geeked around with a Commodore 64 - he was ready for something more than the island's trash-blown, anti-Gotham sprawl.

Once at Datek, Citron lived on cheap Chinese takeout and worked like a fiend.


Levine spent most of his childhood in the middlebrow suburb of New Rochelle, New York. After failing out of the electrical engineering program at Carnegie Mellon, he was hired by Maschler as a tech handyman. One assignment was programming a quotation system for Datek traders. Ring a bell and you can watch him dance via webcam. In just four short, work-soaked years, both men have grown very rich. Citron, who took over Datek in , now lives far from the gull-crowded kills of Staten Island, in a mansion in Brielle, New Jersey, a wealthy enclave on the Jersey shore.

His 40 percent stake in Datek Online Holdings could be worth billions if the company, which operates Island and Datek Online, the fourth-biggest online brokerage, goes public. He gathered a few toys along the way, including a Gulfstream jet, which, like the Brielle estate, he bought in from Robert Brennan, a New Jersey penny-stock manipulator who made a fortune fleecing small investors before he was busted in The jet was destroyed in a accident at LaGuardia airport.

Brennan was an acquaintance of Citron's old boss Sheldon Maschler, who also ran into trouble: He has been chased from the securities business for his alleged participation in a stock fraud. Neither Citron nor Levine has been linked in any way to Brennan's or Maschler's misdeeds. Levine has also earned a small fortune, but money has changed his life less. He lives in an apartment near the Manhattan anchorage of the Brooklyn Bridge, next door to his sister.

When he got married last year, he did it at one of his favorite spots in the city: Coney Island. Now 31, Levine still exudes a certain nerdy puckishness. His Web site www. In "Josh's Corner" you'll see a bullet-headed, pale, dark-haired young man wearing a T-shirt and tapping away at a computer amid a dumpster-like heap of bottles, cans, take-out food containers, papers, and books.

Levine is matter-of-fact about his financial standing. Definitely enough for my family and me to live happily ever after.

The World Trading System

Levine is suspicious of the press and expresses doubt that reporters are willing to take the time to understand Island's implications for the market and investors. His distrust extends to many in his own industry. Asked who he might admire in the financial world, he answers, "Admire is a pretty strong word to be using in the securities industry. Such barbs hint at a reservoir of conviction in Levine's work.

He routinely speaks of making Island's mission clear to "the people. What he envisions is a "pure auction" market - much like the days when buyers and sellers met in the Tontine Coffee House or in the open air along Wall Street to trade in centuries past. When pressed, Levine espouses a pragmatic manifesto for a marketplace that would be libertarian markets should be fair by design, so they don't need regulation or monitoring , democratic the more participants, the better , and rational usage fees should be reasonable and encourage participants to behave in ways that are good for everyone.

But despite the explosion of ECNs, the new access afforded by technology, and the SEC's strong actions, Levine remains unimpressed by the progress toward his ideal marketplace. Myself included. Provoked by Nasdaq brokers' ostrich tactics during the October crash - as the market plunged, they simply stopped answering phone calls from investors trying to escape the disaster - the commission made it mandatory for market makers to not only honor but give precedence to orders entered on a then little-used network called the Small Order Execution System.

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For market makers, the acronym SOES soon carried roughly the same emotional charge as the words "James Gang" did for Midwestern bankers in the s. Now the once-lowly small fry are market makers themselves. The SEC intended SOES to be an equalizer, a way for a small investor who wanted to buy relatively small lots of stock - generally less than 1, shares - to get a market maker's best price. But SOES did much more than that: It revived widespread daytrading, which had been in extended hibernation since the crash of Before long, market makers complained of being under attack by "SOES bandits.

The system trimmed market players' profits and stirred their resentment of small players. As daytrading blossomed, Levine and Citron hacked together Watcher, a program that let traders enter SOES orders, keep an eye on Nasdaq market maker quotes, and track their own positions all on one screen.

The software's success led Citron to make a career move: Convinced that writing and licensing software could be more profitable than trading, he left Datek in and started a succession of small firms, eventually founding SmithWall Associates in and bringing on Levine as a minority partner.

The firm licensed the constantly improving Watcher to the daytrading industry and raked in a small fee for every transaction processed. Along the way, Levine built a program that detected moments when the several hundred traders using Watcher made bids or offers that matched. Such occurrences were, in fact, far from rare, but when orders fell inside market makers' buy and sell quotes, they would go unfilled. The customers were stuck - one with cash to buy and the other with shares to sell - even though they agreed on price. In late and early '96, Citron and Levine built a system that allowed Watcher customers to bypass the market makers altogether and trade directly with each other.

It was the first iteration of Island.

A Regulatory Solution

The exchange quickly gained popularity with institutional trading firms for its execution speed and the anonymity provided by the electronic trading platform, before merging with the NYSE to form the NYSE Arca Exchange. Prior to the acquisition of Archipelago, 90 percent of trade executions on NYSE were entered manually into the system. The exchange commands For example, market makers are charged a fee to remove liquidity and provided with a rebate for adding it. Day Trading. Stock Markets. Trading Basic Education.

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