CHICAGO - Archipelago LLC expects its new ArcaEx domestic equity exchange to become a major exchange along the lines of the New York Stock Exchange and the Nasdaq within two years.
The Chicago company, which has operated an institutional electronic communications network since 1997, has a strong chance at succeeding in its quest to become the first online major exchange of listed stocks from the NYSE, American Stock Exchange and Nasdaq, industry insiders say.
In addition to trading stocks, ArcaEx will conduct auctions of single-price stocks twice a day - at 8 a.m. and 9: 30 a.m. Eastern time.
"I think we'll be a major national exchange," said Jerry Putnam, chief executive officer. The exchange's "totally open book" reporting methods, transaction speed, transparency, pricing, and absence of a trading floor also will make ArcaEx unique and attractive to its clients, said Mr. Putnam.
"Our seats are worth zero," said Mr. Putnam referring to the "level playing field" nature of ArcaEx. "Our trading floor is the Internet," he added.
When ArcaEx opens in late March, 360 companies will be listed. The names include IBM Corp., AT&T Corp., General Motors Corp. - all of which are listed on the NYSE as well. ArcaEx also will have 40 companies, including the Bank of Guam, which are solely listed on ArcaEx.
If all goes according to Archipelago's plan, 20% of all listed NYSE stocks and Nasdaq stocks will be traded on ArcaEx by March 2004. Currently, Archipelago's ECN trades 2% of all listed stocks and claims to have the largest execution point of all Nasdaq stocks.
The goals are not too high, Mr. Putnam said. "We have been an ECN for five years and we have a lot of liquidity."
"This kind of transparency is something that people need right now," said David Leinweber, visiting faculty member in the economics department of California Institute of Technology and former partner of money manager First Quadrant LP. He said decimalization created more of need among institutions for services like ArcaEx.
ArcaEx increased its liquidity pool by acquiring REDIBook, a competing ECN, in October. "You're combining the two ECNs that have been the fastest growing," said Mr. Cavallero of the move. He added that Archipelago has another competitive advantage in its relationship with Pacific Exchange.
In March 2000, Archipelago struck a deal with the 120-year old Pacific Exchange, San Francisco, to buy the PCXE, an equities trading subsidiary, for an undisclosed amount of cash and Archipelago stock. The exchange's regulatory body will be used by ArcaEx to satisfy the Securities and Exchange Commission's regulatory requirement.
Dan Franks, senior vice president-market operations of Nasdaq, said although he views Archipelago as a competitor, the exchange business' lines of competition are blurry. He expects the two companies to become customers of each other.
Archipelago's main concerns will be regulatory and legal related, said Damon Kovelsky, analyst at Meridien Research, a Newton, Mass., research firm. By SEC regulations, Archipelago will have to provide audit trails. The new technology needed will be minimal for Archipelago.
More won't hurt
As good as Archipelago's current liquidity is, more will not hurt, said Mr. Kovelsky. "They have their over-the-counter liquidity," he said. He added that a large volume of previous Archipelago trades were pass-through trades, in which liquidity was found outside the Archipelago system. He expects Archipelago's new system will generate more internal trades.