I think the argument here (which I am not saying actually happens or can happen, as everything I know about this comes from reading this discussion) is that it is a little underhanded if you go "anyone want to be the other side of this transaction?" and someone in the room decides that you were a sucker for giving him the announce notice, opens his laptop, manages to find out that outside the room the going price is actually $450, quickly buys some at that lower price, and then sells it to you at $500, whereas if he didn't get involved that $50 difference would have stayed with you (as your $500 intention would have been fulfilled at the slightly lower rate in the larger market).
That may be the nature of the complaint, and it is definitely the underlying concern of the NBBO rules. But by saying "hey, anyone want to be the other side of this transaction" you're stating the price at which you'd find a trade beneficial.
This gets back to the nature of the market price. There is a fallacy that the market price is the price of the last trade. At any price, there is some combination of supply and demand.
Similarly, at any latency, transaction fee, etc., supply and demand may converge slightly differently (without NBBO rules). Since there is always the risk of trades occurring too far away from the price on the larger market, any ETN trader is going to figure out what his/her risk aversion is to this phenomenon and design his/her strategy accordingly.
For an HFT trader on an ETN w/o NBBO rules, it might make sense to buy a data feed from the NYSE to be sure to be aware of the up-to-the-second prices there. The NBBO rules benefit both the large mega-exchanges like the NYSE and also benefit other market participants who would have to buy a separate data feed to reduce risk, by strapping the cost of that additional data onto the backs of all the other participants, even those who would have a greater appetite for risk or whose strategies don't depend as much upon the ultimate depth at a given price.
What makes this even sillier is that for the small investor, trades on something like eTrade cost $20 each. If you're simply moving the investment between two investments that means two trades. This makes a LOT of strategies utter failures and not worth trying. The world of ETNs is just one more step of automation, dollars, and sophistication away from a simple eTrade account... hence its highly disruptive nature and the many startup hedge funds that have sprung up.
The genius of ETN creators was the realization that there is lots of depth provided by smaller, more niche players... to the point where many trades can be filled directly on the ETN for no fee. This opens up the door to many strategies that would simply have been impossible before, and combines the capital of each of these smaller players... each of whom has some exposure and who combined offer non-trivial depth... enough to take away volume from the major exchange monopolists.
This was not lost on the major exchanges who used their clout with regulators and journalists to institute the NBBO rule, to paint flash orders in a negative light, and generally sure up their monopoly positions against any competition.
Yes I said it, the major exchanges should be subject to a major anti-trust investigation and broken up. Of course, everyone (regulators included) is so afraid of upsetting the market that this will never happen... and if some other country opened up a market allowing such things, the US would ban Americans from using it.
What is your definition of "ETN"? The only definition I know is "Exchange Traded Note" which doesn't make sense here. Do you mean "ECN"(Electronic Communications Network)?
