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September 30, 2003

Archipelago's Listed Business Ambitions: ArcaEx Gets Serious About Building Critical Mass

By Gregory Bresiger

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  • Archipelago's Listed Business Ambitions: ArcaEx Gets Serious About Building Critical Mass

Can ArcaEx pull it off?

Many in the industry - both the Archipelago exchange's electronic and traditional rivals - will be watching closely to see if the strategies that have pulled it into the black on the Nasdaq and OTC side will now give it success on the listed side.

Archipelago's leadership has committed itself to capture a huge new slice of the listed business. It's a business that, bold public statements aside, it has been barely able to touch.

"It'll take critical mass in trading listed stocks for Arca to succeed," said Tom Hearden, a buyside trader at Strong Capital. "It doesn't have that critical mass right now. The New York Stock Exchange does."

Only in select listed names like General Electric, and in the ETFs, does Arca now have an impressive record. During special news periods this year, ArcaEx said it handled more than 10 percent and 18 percent of AMR and Lucent respectively. "If it's a name where the specialists are in control on the NYSE, my order goes to the floor," said another trading pro.

But ArcaEx is determined to change all that. And it is determined to make marketing hay while the NYSE - thrown into temporary disarray in the wake of the forced resignation of its chairman Dick Grasso - steels itself for some pitched battles ahead.

ArcaEx, the Chicago-based electronic stock exchange, wants to replicate the huge strides it has made on the non-listed side. Indeed, it has been eating Nasdaq's lunch recently, several trading executives said and a recent report has confirmed.

"Arca's SuperMontage market share has increased since dipping in March 2003. While numbers reported by ECNs are not always comparable, some conclusions can still be drawn from the data that is reported," wrote Putnam-Lovell NBF in the report prior to Arca transforming itself into a stock exchange. "Arca's market share (excluding routed volume) increased to 22.9 percent since March 2003 when it was 12.2 percent compared to the 15.0 percent reported during June 2003 to date."

Attraction

Arca's appeal is a combination of factors, including fast, low-cost executions and anonymity. And it wants to make its market more attractive for Nasdaq market makers, allowing them to post "attributed quotes." That could hurt Nasdaq's troubled SuperMontage, a facility which also allows dealers to represent themselves.

"Archipelago does everything right. They are going to be a long-term player," according to John Wally' Sullivan, president of Pulse Trading.

Indeed, with competitors like Archipelago and Brut taking business from it, Nasdaq's SuperMontage has been losing market share. The Nasdaq trading platform handled 16.4 percent of Nasdaq volume in July. That's down from 19.1 percent in January.

All of this is hurting Nasdaq's bottom line. It reported a $49 million loss in the second quarter. Nasdaq also has some $418 million of outstanding long-term debt. And about $5 million of its $178 million in senior notes have come due this year. With Nasdaq in the red, Archipelago, after six losing quarters, recently announced it was making money.

"They're profitable, but only marginally profitable," according to Todd Halky, an analyst with Putnam-Lovell NBF. A buyside trading pro countered that Archipelago has made great progress in its Nasdaq trading.