Online stock exchange pounding on the door
April 15, 2003
BY TED PINCUS
'What kind of business has the ability to increase prices in the middle of a recession? Only a monopoly, like the New York Stock Exchange," according to Gerry Putnam, who today is cracking that monopoly with increasing success.
CEO of Chicago's adolescent Archipelago Holdings LLC, parent of the leading online stock exchange, Putnam on Monday reached a key goal in his six-year crusade: adding all Nasdaq-listed stocks to his ArcaEx trading platform.
The net result makes the system the only stock exchange trading all NYSE, Nasdaq, American Stock Exchange and Pacific Exchange listings. "Essentially," he said "it offers a single destination to trade all 8,000 stocks and with maximum efficiency, transparency, anonymity, speed and fairness. We're truly leveling the playing field for the investor."
One of the first of a new breed of purely electronic stock exchanges emerging in recent years, ArcaEx allows all buyers and sellers, including broker-dealers, sponsored institutions and market makers, to meet electronically and view the same trading information via an open order book.
Speed spells profits
It employs a proprietary algorithm--smart order-routing technology--to seek out and identify the best price available. Especially to large investors and funds trading massive amounts of stock, small price differences and the speed to exploit those differences, can mean big dollars.
The new venue is called an ECN, an electronic communications network, and today, ECNs have won more than half of all OTC stock volume and almost a fifth of NYSE volume.
"The significant aspect to the investor," Putnam said, "is our routing system to instantly find the best current price on ours or any other exchange, and execute there. This is not available at most other ECNs. And when it comes to comparing a trade on an ECN vs. through a floor specialist at NYSE, the difference is huge. About 80 percent of the time, that specialist will place a trade for his own account before yours, so there can be a price variation. Moreover, the average trading speed for an NYSE transaction is 11 seconds vs. 50 milliseconds on an ECN."
Who can choose to have a trade executed through an ECN?
Anyone, merely by request to a registered broker-dealer. ArcaEx, for example, has more than 400 of them holding Equity Trading Permits it requires for on-line access and execution. And if an individual or institution wants to control the entire transaction, they would simply access an on-line broker-dealer's order server, and with a few PC key strokes check the latest price quote and complete the entire sequence of a market order (governed strictly by supply/demand for the stock at that moment) or a limit order (stipulating a maximum or minimum price desired). At ArcaEx, the transaction cost is one mil per share.
This is an ideal pursued by Putnam, 44, since he graduated from Wharton and arrived in Chicago in 1985 as an options trader for Walsh Greenwood. It crystallized in 1996 when he attended a Nasdaq management briefing session here, and asked the exchange to take advantage of new legislation to build a more efficient market through electronics.
When his idea was rejected, he sought out Chicago's Stuart Townsend of Townsend Analytics software, which in 1986 had developed the Windows-based real-time stock quotation system. Together they created Archipelago, and the unique ability to offer "connectivity to all liquidity points" (across all marketplaces).
By this year, Archipelago has grown to encompass 325 million shares of daily Nasdaq volume and 50 million NYSE shares.
$300 million in revenue
It all translates into more than $300 million in gross revenues this year, Putnam said, and he's confident he'll turn his first profit. To his knowledge, his is the only ECN yet to realize black ink, and he sees a rising trend. Of his 195 employees (two-thirds in Chicago), 30 are shareholders.
Is an IPO in the offing? Putnam said, "It's something I'd certainly like to do if the general IPO market improves."
A greater market share appears just around the corner. Putnam aims for a 35 percent share of Nasdaq volume by next year (including 10 percent transacted through other ECNs) and 10 percent of NYSE volume. Not bad for what used to be called a "regional financial center."
Ted Pincus is the former chairman/CEO of the Financial Relations Board and former vice chairman of BSMG Worldwide. He is an adjunct professor of finance in the MBA program at DePaul University, and is an independent consultant and journalist. |
