The study, 'The Road Ahead - An ECN Industry Outlook', examines the challenges facing ECNs and how their responses will affect their ability to sustain growth and maintain competitive position.

ECNs are considering liquidity strategies to remain competitive, says the consultancy. Many are developing partnerships with traditional broker-dealers while others are trying to address the needs of institutional investors.

Some ECNs are routing trades to other ECNs or market makers. And the exchanges are responding to the rise of ECNs by creating their own trading platforms.

Given the number of ECNs vying for the same liquidity pool, consolidation has already begun and is likely to continue, says the report.

The consultancy notes that it remains to be seen which strategy will be most successful for differentiation.

Some ECNs are seeking to become an exchange with the hope of building credibility to attract customers. But they have to satisfy the related SEC requirements and develop a self-regulation programme.

Others believe imitating traditional broker-dealers by offering a breadth of products and services, is the way to create a niche for themselves. Another group sees cost as the way to compete and specialises in offering a single product or service at low cost.

The study also finds that many ECNs have not yet fully considered risk issues or implemented a management strategy. In addition, ECNs are confronted by risks resulting from new regulations, technologies and changes in industry standards as well as market and credit risk. Other challenges include legal and compliance risks based on securities and automated transaction regulations.

Changing industry standards regarding settlement times (T+3 to T+1) means that organisations must invest additional resources to achieve straight-through processing, says the consultancy.