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May 10, 2006

Putnam's Farewell Address

By Peter Chapman

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On January 31, Gerry Putnam gave his final analyst briefing as chief executive of Archipelago Holdings. On March 7, he became president and co-chief operating officer of the newly formed New York Stock Exchange Group. The questions he fielded at the briefing go right to the heart of the business of running a stock exchange: market share, pricing pressures, new competitors, operational issues, etc. Traders Magazine has excerpted some of the lengthy interview. Due to the raw nature of the transcript, the questions have been streamlined and, in some cases, the answers have been made clearer.

Analyst: Why the decline in Archipelago's Nasdaq market share?

Putnam: The market share decline in Nasdaq securities seems to have stopped in January. We are encouraged [by Nasdaq's move to] rationalize pricing. They decided that being a price leader wasn't a winning strategy. As new rates come into effect in February... Again, we are already seeing a turnaround in the market share decline. So we're encouraged by that.

Analyst: Does competition from the new crop of ECNs concern you?

Putnam: As far as the competition goes... Citicorp seems to have... there is a fair amount of internalizing that's going on in the marketplace anyway. And as Nasdaq becomes an exchange and separates out the print facility volume from its exchange base volume, we'll get a better view of exactly how much of that takes place. But that's kind of where I see the new competition unfolding. I don't imagine that a Citicorp owning an ECN is going to attract a lot of volume from its customers. I just never felt that, just to pick a name, Morgan Stanley, would like to write a big check to CSFB for trading on its [ECN]... in a market center exclusively owned by a competitor. Those of us in the ECN business that were successful took the consortium approach. So I don't think that changes. But there are signs of more internalization, or at least automating the internalization. Collecting some revenues as a result of the new trade-through rule that will apply to Nasdaq securities. So I think that's part of that strategy. I don't think we feel overly threatened any more [than we do by] UBS [directing] more order flow to its system and crossing it internally.

Analyst: The New York Stock Exchange is seeing a decline in its market share. Is that a concern?