June 10, 1999
Dow Jones Newswires
J.P. Morgan Sees Archipelago As An ECN Survivor
By TARA SIEGEL
NEW YORK -- J.P. Morgan & Co. (JPM) is the latest Wall Street bigwig to enter the electronic-trading fray with its investment in Archipelago, the electronic network it expects to prevail in an eventual shakeout among alternative trading systems.
"It's our view that the rules of the financial intermediary are changing, and in many ways no one has a clearly defined vision of what the future will look like," said Bob Gasser, J.P. Morgan's head of U.S. equity trading. "The market is fragmented, and Archipelago, for a variety of reasons, will be one of those survivors and will thrive (after) consolidation."
J.P. Morgan, the nation's fourth-largest bank, said earlier Thursday it would acquire a 20% interest in Archipelago, an electronic communication network, for an undisclosed amount. It's the company's first major foray into the ECN arena. A portion of J.P. Morgan's stake in the Chicago-based ECN represents an indirect 5% interest held by American Century Cos., a mutual fund company 45%-owned by J.P. Morgan.
Archipelago, one of the original four ECNs to be approved by the Securities and Exchange Commission in 1997, is also owned by its chief executive, Gerald Putnam; Goldman Sachs Group Inc. (GS); and E*Trade Group Inc. (EGRP). Each holds about a 20% stake.
There are several reasons J.P. Morgan approached Archipelago over other ECNs, Gasser said. For one, it was the first system with an open architecture, which allows it to communicate and search for liquidity outside its own network. It is also intrinsically "intelligent," which means it seeks out the best buyer or seller of a security based on historical performance. Moreover, Archipelago has the venerable Goldman Sachs backing it, along with E*Trade, which puts J.P. Morgan in good company.
Archipelago, which opens at 8:30 a.m. and runs until 5 p.m. EDT, already affords two hours more trading time than traditional markets, and is expected to follow the Nasdaq market's lead should they decide to extend trading hours. Nasdaq has proposed an evening session on some of its most liquid stocks, starting at 5:30 p.m. and ending at either 9 p.m. or 10 p.m., and hasn't yet said whether it will wait for the NYSE to act. The NYSE put off a decision until 2000.
"It's our view Archipelago would be an active participant in any extended-hours paradigm that exists," J.P. Morgan's Gasser said. "Any extended-hours model has to be technology-driven."
Moreover, Archipelago will allow J.P. Morgan to anonymously execute orders, hampering opportunities for others to trade on or speculate about a specific trade.
"If done correctly, it reduces transparency pretty significantly," Gasser noted.
ECNs, which fill orders by matching buyers and sellers, can register as broker-dealers or exchanges. The number of ECNs that have registered with the SEC to display their quotes under the "ECN display alternative" has grown to about nine, from the original four approved in 1997. The rise in alternative trading networks has prompted concerns about liquidity, as the marketplace becomes increasingly fragmented.
"One of the reasons why the U.S. markets are real efficient is because they are centralized, and the vast majority of the activity is in one market," said analyst Larry Cohn, of Ryan Beck & Co.
Clients are concerned too, Gasser noted, which ultimately increases the importance of broker-dealers, who must ensure the best prices are found.
How central ECNs will become to trading is yet to be determined. But the denizens of Wall Street are undoubtedly hedging their bets.
"Everyone is trying to figure out where the world is going with this stuff, and I think essentially, this is a defensive investment," said Cohn, "If this takes off, they want to be there."
Goldman Sachs, Merrill Lynch & Co. (MER), Morgan Stanley Dean Witter & Co. (MWD) and market maker Knight/Trimark Group Inc. (NITE) own stakes in an ECN called Brass Utility, known as BRUT. Strike Technologies LLC, another ECN, was created by Bear Stearns Cos. (BSC) and includes Lehman Brothers Holdings Inc. (LEH), PaineWebber Group Inc. (PWJ) and Donaldson Lufkin & Jenrette Inc. (DLJ) among its 19 owners.
In addition to BRUT and Strike, other well-known alternative trading systems include Reuters Group PLC's (RTRSY) Instinet, Optimark and Eclipse Trading Inc. Merrill Lynch, Goldman and Bernard L. Madoff Investment Securities also recently said they would form Primex Trading N.A. LLC, which, unlike ECNs, will offer a more open-call like electronic system that offer orders that match or beat the best stock quotes publicly displayed.
-Tara Siegel; 201-938-5288; tara.siegel@dowjones.com
-Gaston Ceron and Lynn Cowan contributed to this report.
--------------------------------------------------------------Briefing Book for: AXA | BSC | DIR | DLJ | EQ | F.AXA | GS | JPM | LEH | MER | MWD | NITE | PWJ | RTRSY | U.RTR |
