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July 31, 1999

Stakes Raised Amidst A Wave of ECN Deals

By Staff Reports

Some of the largest brokerage firms are placing big bets on electronic communications networks.

Chicago's Archipelago, and REDIBook, operated by Spear, Leeds and Kellogg in New York, will likely generate fatter wallets for partners with both direct investments and substantial new order flow from them.

Charles Schwab, Fidelity Investments, Donaldson, Lufkin & Jenrette, and Spear, Leeds & Kellogg formed a joint venture based on Spear, Leeds' REDIBook. REDIbook traded about 175 million shares in June, according to Nasdaq Trader. Separately, Reuters Group's Instinet is taken a 16.4 percent stake in Archipelago, investing an estimated $30 million. The ECN traded roughly 165 million shares in June, according to Nasdaq Trader.

The arrangements raise different implications for both sets of partners. The REDIbook consortium plans to offer extended trading hours via a new ECN based on REDIbook.

At the same time, the partners could generate a revenue stream from customer limit orders they plan to route to the new ECN.

"Schwab spends millions of dollars on ECN fees," said a spokeswoman for the San Francisco-based discount broker. "We expect some cost savings from this venture."

Instinet said it is attracted to Archipelago's business model, which includes a plan to register as a stock exchange with the Securities and Exchange Commission. The ECN, which is popular with day traders and options specialists, is toying with 24-hour trading.

"We've bought into Archipelago's move out of the ECN model," said Doug Atkin, president and chief executive of Instinet. "The ECN is not a sustainable business model."

Arthur Pacheco, who heads STRIKE, an ECN based New York, thinks there will be consolidation among the nine - and soon to be ten - ECNs. "There is not room for them all," Pacheco said. STRIKE handled 43 million shares in June, according to Nasdaq Trader.