By William Fellows
Archipelago thinks the days of the US ECN electronic communications network market are numbered and is filing with the SEC to become a full-fledged self-regulating, for-profit stock exchange. It has taken on an investment from Reuters Group Plc’s Instinet electronic brokerage amounting to a 16.4% shareholding. With Etrade, Goldman Sachs, JP Morgan and American Century already standing behind it as investors the company believes it has got enough weight to carry it forward as an all-electronic virtual exchange. It appears to want to create an organization which will have all of the clicks but none of the mortar of say Nasdaq.
Its opportunity as an ECN is waning, Archipelago believes. ECNs – the SEC approved four, including Archipelago back in 1997 – can only thrive in a transition market such as the US market. Where stock exchanges are efficient in terms of cost and execution, such as most of the European bourses, there’s little headroom for ECNs to operate in. While Nasdaq has embraced ECNs, many of the listed US exchanges haven’t and Archipelago says getting a stock market listing will help it penetrate those other markets. It believes chief competition Island ECN has failed to become a stock exchange even though it thinks there is room for competing, for-profit exchanges.
Instinet wants a piece of the action is going but does not want to become an exchange in its own right. Its competency is broking and buying into Archipelago will help it build out a full service, it says. Instinet should also give Archipelago some valuable exposure in Europe, where it’s got little presence. Archipelago makes money by shaving a fraction of a cent from every transaction is executes. The two are also looking at other areas in which they can work together.
The news comes just days after the SEC warned Nasdaq and NYSE that turning themselves into for-profit public companies must be accompanied with zealous and adequately funded self-regulation. Sounds like a license to print money. á
