On the heels of its agreement to sell a 16.4% equity stake in the company to Reuters Instinet Corp., Chicago-based electronic communications network (ECN) Archipelago LLC last week indicated that it will likely extend its hours of operation by September. Driven by demand from its retail investor clients, Archipelago, which currently runs from 6:30 a.m. to 5 p.m. EST, expects to expand its hours to 9 p.m. or 10 p.m. EST. Archipelago, which ultimately wants to migrate to a 24-hour trading environment, is also filing an application with the SEC this week to be registered as a self-regulated stock exchange.
The deal between Instinet and Archipelago groups Instinet in an ownership cluster that includes Goldman Sachs, E-Trade Group, J.P. Morgan and American Century Companies--all of which purchased minority equity stakes in Archipelago earlier this year. Collectively, that quintet now owns 82% (or 16.4 % each) of Archipelago, an equity trade matching system which competes on some level with both Instinet, the largest institutionally-oriented ECN, and Datek Online Holding Corp.'s individual investor-targeted Island ECN. Archipelago may also in the near future find itself in heated competition with a new, Fidelity Investments--backed ECN consortium (ETW, 7/26/99).
While Island has already filed with the SEC to become an exchange, the consortium--which will unite Fidelity with Charles Schwab, DLJ and Spear Leeds and Kellogg--plans to launch a traditional, broker/dealer-regulated ECN in September. However, while Archipelago is cognizant of the waves being made by rival ECNs, the firm formed its recent partnership and regulatory status decisions on its own initiative, says Archipelago chief executive officer Gerald Putnam.
Putnam says that the process of getting the green light to operate as an exchange likely will take anywhere from "nine to 18 months," but Archipelago plans to forge ahead with that plan even if it takes two to three years. "The ECN model is going to change considerably once there are electronic stock exchanges in operation... and our focus is on becoming an exchange," he says.
That said, prior to becoming an exchange, Archipelago intends to respond to customer demand for longer trading hours. Archipelago's customer base, Putnam says, is comprised of 40% professional traders (including Nasdaq market makers), 30% institutional investors and 30% retail investors. Within that group, the loudest cries for extended trading hours have come from retail investors. "People want to execute a transaction that they can see a real price in after they get home from work," Putnam explains.
Within the next couple of months, he adds, Archipelago will run a few hours past its current 5-p.m. close. However, noting that foreign currency markets currently trade 24-hours a day, Putnam says
Archipelago ultimately wants to operate on a round-the-clock basis. "We don't like the idea of pre-market, during the market and after-market," he says. While declining to predict when Archipelago will run on a 24-by-7 basis, Putnam says that it is "technically" possible to do that right now.
In July, Archipelago traded a daily average of roughly 25 million Nasdaq stocks and 10 million New York Stock Exchange-listed issues. Archipelago does not expect Instinet's new equity stake to significantly boost those figures, Putnam says. But if it were to get the go ahead to operate as an exchange, he says, Archipelago could spike its volume by competing on a direct, head-to-head level with both Nasdaq and the NYSE.
Sources say that Archipelago's potential exchange business model was also a motivating factor for Instinet, which has no intention of registering its own ECN as an exchange but wants a presence in that game. Instinet CEO Doug Atkin did not return calls by press time.
Instinet's relationship with Archipelago really dates back to February of this year, when the firms decided to build an electronic interface between Instinet's ECN and Archipelago. That arrangement, Putnam says, calls for Archipelago to lift orders from Instinet when the ECN "has a customer order that's better than what's available" over its own platform. "Order flow that's coming to us that could be filled at a better price on Instinet, is routed to Instinet," says Putnam. Interestingly, despite the interface, Instinet does not lift orders from Archipelago.