Nasdaq May Acquire Archipelago to Boost Volume
New York, Feb. 24 (Bloomberg) -- The Nasdaq Stock Market, the
world's first electronic equity market, may buy Archipelago LLC or
another rival to boost volume as trading has slid 30 percent this
year, executives of the two companies said.
``We've talked with just about anyone active in the market''
about combining companies, said Nasdaq President Richard Ketchum,
adding that Nasdaq's board supports building trading volume
through mergers or rule changes that would let more brokers trade
on its system. ``It's hard to look at this environment and not
conclude that there will be more consolidation.''
Falling share prices and the slide in trading have forced
companies such as Nasdaq and Archipelago to slash fees as much as
90 percent. A merger would help Nasdaq increase its revenue after
spending $107 million to create a new trading system,
SuperMontage, which it unveiled in October.
``We all make a tiny sliver of money on every trade, so there
is an advantage in getting bigger,'' said Gerald Putnam Jr., chief
executive and co-founder of Chicago-based Archipelago. ``I don't
have a deal with anybody to either acquire or be merged, but the
level of activity and conversations has increased.''
Three transactions last year have already helped consolidate
the industry: Instinet Group's $508 million purchase of Island ECN
Inc., Archipelago's merger with fellow ECN RediBook LLC for an
undisclosed price, and Sungard Data Systems Inc.'s $100 million
acquisition of Brut LLC, an ECN that was owned by 25 broker
dealers including Merrill Lynch & Co. and Morgan Stanley.
Boosting market share ``through merging is one way to get
more money,'' said Jamie Selway, Archipelago's former chief
economist who left with three colleagues two weeks ago to start an
electronic brokerage.
SuperMontage
Nasdaq's $107 million SuperMontage trading system, started in
October for dealers in Nasdaq stocks to list quotes and make
trades, executes about 19 percent of shares in companies that list
on the Nasdaq Stock Market. A combination with Archipelago would
increase that to about 29 percent, just shy of Instinet's leading
30 percent share. It may also end price cutting among trading
systems that is eroding profits, company executives said.
``If our share at the end of 2003 is still about 20 percent,
we will be very disappointed,'' Nasdaq's Ketchum said.
To capture a bigger piece of a shrinking pie, Nasdaq this
month opened SuperMontage to firms that until now had to send
their trades through traditional market makers such as Goldman
Sachs Group Inc. and Bear Stearns Cos. The pilot, aimed at program-
trading firms and professional day traders, didn't attract trades
in its first week.
SuperMontage was built to clear more than 4 billion shares a
day. Nasdaq stock trading across all venues has fallen to about
1.2 billion daily from an average of 1.7 billion last year.
Instinet's Loss
``Volume stinks,'' said Ketchum, a former lawyer at the
Securities and Exchange Commission who said he is competing to
succeed Nasdaq Chairman Wick Simmons this year.
Nasdaq has followed its rivals in cutting prices. Earlier
this month it eliminated fees for most of the millions of quote
updates made daily on SuperMontage. Electronic communication
networks such as Archipelago and Instinet's Island pay brokers 2
cents for every 1,000 shares they offer to sell on their systems,
and charge 3 cents per 1,000 shares removed through purchases.
Nasdaq's fee revenue from trading and from selling market
data and services to its listed companies fell 4 percent in the
first nine months of 2002, to $616 million from the same period in
2001. The company will report fourth-quarter and full-year
earnings on March 10.
Instinet's October purchase of Island, the biggest ECN,
wasn't enough to offset declining fees and a fourth-quarter loss
of $112 million, Chief Executive Ed Nicoll said earlier this
month. Reuters Group Plc, owner of 63 percent of Instinet, last
week said the unit will lose money this year, sparking talk that
the trading company may be up for sale.
Liquidity
``Our biggest challenge right now is riding out the
markets,'' said Jean-Marc Bouhelier, Instinet's chief operating
officer. He said he wasn't aware of any merger talks involving
Instinet.
Behind the battle for orders is the preference of mutual
funds and other large investors to trade where supply is strongest
so their orders can be executed gradually at minimal impact to
market prices.
``Liquidity begets liquidity,'' said Charlotte Chamberlain,
an analyst at Jefferies Group Inc. in Los Angeles who has been
critical of the $107 million Nasdaq spent to build SuperMontage.
If Nasdaq can buy Archipelago, ``presumably more people would
execute trades there,'' she said.
Regulatory approval of an Archipelago-Nasdaq combination
might be complicated by cross-ownership positions among ECNs.
Instinet, for example, owns five percent of Archipelago, said
Putnam, who himself owns 5 percent. Goldman Sachs, part of the
consortium that owned RediBook, is Archipelago's biggest
shareholder.
ArcaEx Feud
Nasdaq is also feuding with Archipelago over its plan to
transfer orders for Nasdaq stocks from SuperMontage to ArcaEx, the
exchange Archipelago formed after buying the Pacific Stock
Exchange trading system in October 2001. ArcaEx trades all New
York Stock Exchange stocks, and two weeks ago listed its first
Nasdaq stock. The company said it hopes to quote all Nasdaq stocks
on ArcaEx by summer.
Archipelago's Putnam estimated the company pays Nasdaq $30
million in SuperMontage access fees annually, much of which could
be avoided by the switch. He also said the ECN will continue
sending orders to SuperMontage or other venues when they display
better prices than ArcaEx. Nasdaq has tried to thwart the plan, he
said.
Hours before its first Nasdaq stock was listed on ArcaEx on
Feb. 14, Nasdaq told Archipelago general counsel Kevin O'Hara the
ECN lacked the proper legal structure for funneling orders to
SuperMontage.
``We are a very good customer of Nasdaq, paying the full
freight, and they don't want us to have access to their
liquidity,'' O'Hara said. Nasdaq relented temporarily and the spat
is now under discussion with the SEC, he said.
Bloomberg LP, the parent of Bloomberg News, owns Bloomberg
Tradebook, an ECN that competes with Archipelago, SuperMontage and
Instinet. Bloomberg also competes with Reuters in the distribution
of financial data and news.
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