The New York Stock Exchange traces its routes back to a buttonwood tree in lower Manhattan in the 1700s. Under this tree met the speculators of the day who bought and sold pieces of paper -- "stock" -- representing shares in local enterprises. Prices for each trade were determined by direct negotiation between the two parties. Over the years, the one-to-one market in stocks has fallen by the wayside with the introduction of middlemen -- the specialist on the floor of a stock exchange or the market maker of a NASDAQ stock -- who take a cut of each trade.

Today, a new method of trading is returning the stock market to its roots. Using a computerized network, investors can place their bid price for a share of stock, or set their own selling price, in an "off-exchange market." These systems are known as Electronic Communication Networks (ECNs). On these systems, investors reap the rewards of smaller spreads (the difference between the bid and ask price of a stock), lower commissions, and better price executions.

Traditionally, institutional investors (such as pension fund and mutual fund managers) have been the biggest users of ECNs. Using their own members-only trading networks, buyers and sellers are matched automatically. One of the best known of these networks is Instinet, owned by Reuters.

Individual investors trading a few thousand, few hundred, or few dozen shares don't have the same muscle in the marketplace as institutional investors. But in 1985, NASDAQ introduced a network called the Small Order Execution Systems (SOES) to facilitate trading of smaller orders. SOES got off to a somewhat bumpy start -- during the 1987 market crash, many investors were unable to get orders filled on SOES during the tumultuous trading sessions. The SEC then decreed that all brokerage firms would participate in the SOES network, ensuring that there would always be plenty of shares available for purchase and sale through the system.

Next, a new type of trader emerged -- the "SOES bandit." These traders used SOES to take advantage of price differences in the same stock as they were posted on the system by different market makers, quickly buying and then selling shares whenever a market maker was slow to update the bid or ask price of a particular stock. The National Association of Securities Dealers (NASD) implemented rules that inhibited this type of trading, but court ruled against NASD in a 1995 lawsuit alleging that the rules were unfair. In 1996, the rules were strengthened to allow larger trades and greater liquidity. This opened the door for a new type of ECN to be born.

One of the first of these new ECNs was Island, created in 1996 by SOES trader Jeffrey Citron, (now chairman of Datek Online), and computer programmer Josh Levine. Island automatically matches bid and asked prices for brokers connected to its network. Besides Island and Instinet, other ECNs include Bloomberg's B-Trade, NexTrade, Archipelago and REDI. Typically, these ECNs charge a fee of between $1 per trade and $1 per hundred shares traded. This low cost has helped boost the volume of trading on these networks -- today over 20 percent of the total volume on stocks traded on the NYSE and NASDAQ exchanges takes place on ECNs.

Unfortunately, individuals can only trade on ECNs in a roundabout way. Hundreds of brokers and trading firms now offer off-exchange trading. Many day trading firms will rent or loan you a terminal in their office, or offer Internet-enabled software that lets you place trades on an ECN via the Internet.

Besides the low costs of ECN trading, there are other advantages as well. Trades can be done at any hour of the day or night, as long as a buyer and seller can be matched. (The latest trend of online brokerage firms offering "after hours trading" will be accomplished using ECNs.) The trades can be done anonymously, a benefit to large institutional investors who don't want to tip off the rest of the market to their strategy. ECNs also allow investors to trade without showing other participants how many shares you are offering to sell.

The latest development in the ECN market is Island's application to the SEC to become a stock exchange in its own right. While the process of becoming a formal exchange can take a couple of years to be complete, Wall Street's financial industry isn't waiting around. E*Trade and Goldman Sachs are just two of the firms who have bought stakes in other ECNs.