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Merrill buys ECN stake
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September 9, 1999: 12:02 p.m. ET
Venerable broker enters electronic trading with piece of Archipelago
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NEW YORK (CNNfn) - Merrill Lynch, a symbol of Wall Street tradition, turned its eyes to the future Thursday as it acquired a 14.3 percent stake in Archipelago, an increasingly watched online trading system.
Archipelago is a leading U.S.-based electronic communications network (ECN) that matches buyers with sellers.
Merrill Lynch wouldn't disclose the terms of the deal.
With the purchase, Merrill Lynch is staking a claim in online trading -- an evolving market that has put increasing pressure on old-time brokerages that have been slow to respond as firms such as Charles Schwab (SCH) and E*Trade attract investor interest in Net-based trading.
It was only in June that Merrill Lynch made its first nod toward electronic brokerage, announcing a plan that would offer online trading by year's end for as little as $29.95 per transaction.
Even that step represented a change of direction for Merrill, which had resisted the idea of online brokerages for years.
With Thursday's move, Merrill Lynch will join a consortium of other Archipelago stakeholders. These include "old school" companies such as Goldman Sachs Group Inc. (GS) and J.P. Morgan (JPM), as well as upstarts such as E*Trade (EGRP) and the Instinet unit of Reuters (RTRSY).
While Merrill Lynch is getting a foothold in electronic trading with the deal, Gerald Putnam, Archipelago's chief executive officer, said the ECN would benefit as well.
"Merrill Lynch, one of the world's largest securities firms, builds on our already strong institutional and retail presence, and helps us address the needs of institutions and individuals alike for fast, fair execution of trades," Putnam said.
Archipelago was formed as a joint venture with software developer Townsend Analytics in 1997 as one of the original four ECNs approved by the Securities and Exchange Commission.
However, the number has grown to nine as others sought to get in on the ECN action, which has become intense. These ECNs accounted for more than 20 percent of the Nasdaq's first-quarter trading volume and made up 30 percent of its trades overall.
ECNs are planning to take on the major exchanges such as the New York Stock Exchange even more directly. Both Archipelago and Island, another ECN, have filed with the SEC to become national securities exchanges, allowing them more unrestricted access to the stocks that are traded so easily on the other exchanges.
However, ECNs currently have some advantages traditional exchanges don't -- namely, they are freer to offer extended trading hours. In this way, they have put the pressure on exchanges to do the same, and both the NYSE and the Nasdaq are looking to extend their trading hours.
More importantly, ECNs claim they can lower the incidental costs of buying or selling stocks. This is because the trades are computerized -- and thus are executed more quickly -- making it more likely you'll get the price you made the trade at.
ECNs may ultimately make the market more efficient, since they ostensibly match buyers and sellers with fewer middlemen and lag time in between.
Still, the ECNs face challenges going forward. The regulatory approval process to become a fully-functioning exchange could take a year and a half.
Regulators are concerned that the ECNs will not have enough liquidity -- that is, have enough shares outstanding so that one large sale won't inordinately sink the stock's price.
ECNs remain confident that they can overcome these issues, and analysts say the ECN market may consolidate -- increasing its size and making it more likely it can offer the liquidity regulators and traders will demand.
Merrill Lynch shares were down 13/16 to 75-1/8 in Thursday late-morning trading.
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Archipelago
Island
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