Online stock exchange pounding on the door

'What kind of business has the ability to increase prices in themiddle of a recession? Only a monopoly, like the New York StockExchange," according to Gerry Putnam, who today is cracking thatmonopoly with increasing success.

CEO of Chicago's adolescent Archipelago Holdings LLC, parent ofthe leading online stock exchange, Putnam on Monday reached a keygoal in his six-year crusade: adding all Nasdaq-listed stocks to hisArcaEx trading platform.

The net result makes the system the only stock exchange tradingall NYSE, Nasdaq, American Stock Exchange and Pacific Exchangelistings. "Essentially," he said "it offers a single destination totrade all 8,000 stocks and with maximum efficiency, transparency,anonymity, speed and fairness. We're truly leveling the playing fieldfor the investor."

One of the first of a new breed of purely electronic stockexchanges emerging in recent years, ArcaEx allows all buyers andsellers, including broker-dealers, sponsored institutions and marketmakers, to meet electronically and view the same trading informationvia 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 tolarge investors and funds trading massive amounts of stock, smallprice differences and the speed to exploit those differences, canmean big dollars.

The new venue is called an ECN, an electronic communicationsnetwork, and today, ECNs have won more than half of all OTC stockvolume and almost a fifth of NYSE volume.

"The significant aspect to the investor," Putnam said, "is ourrouting system to instantly find the best current price on ours orany other exchange, and execute there. This is not available at mostother ECNs. And when it comes to comparing a trade on an ECN vs.through a floor specialist at NYSE, the difference is huge. About 80percent of the time, that specialist will place a trade for his ownaccount 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 Permitsit requires for on-line access and execution. And if an individual orinstitution wants to control the entire transaction, they wouldsimply access an on-line broker-dealer's order server, and with a fewPC key strokes check the latest price quote and complete the entiresequence of a market order (governed strictly by supply/demand forthe stock at that moment) or a limit order (stipulating a maximum orminimum price desired). At ArcaEx, the transaction cost is one milper share.

This is an ideal pursued by Putnam, 44, since he graduated fromWharton and arrived in Chicago in 1985 as an options trader for WalshGreenwood. It crystallized in 1996 when he attended a Nasdaqmanagement briefing session here, and asked the exchange to takeadvantage of new legislation to build a more efficient market throughelectronics.

When his idea was rejected, he sought out Chicago's StuartTownsend of Townsend Analytics software, which in 1986 had developedthe Windows-based real-time stock quotation system. Together theycreated Archipelago, and the unique ability to offer "connectivity toall liquidity points" (across all marketplaces).

By this year, Archipelago has grown to encompass 325 millionshares of daily Nasdaq volume and 50 million NYSE shares.

$300 million in revenue

It all translates into more than $300 million in gross revenuesthis year, Putnam said, and he's confident he'll turn his firstprofit. To his knowledge, his is the only ECN yet to realize blackink, and he sees a rising trend. Of his 195 employees (two-thirds inChicago), 30 are shareholders.

Is an IPO in the offing? Putnam said, "It's something I'dcertainly like to do if the general IPO market improves."

A greater market share appears just around the corner. Putnam aimsfor a 35 percent share of Nasdaq volume by next year (including 10percent 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 RelationsBoard and former vice chairman of BSMG Worldwide. He is an adjunctprofessor of finance in the MBA program at DePaul University, and isan independent consultant and journalist.