Vol 5 No 7
ORGANIZATION AND MANAGEMENT
Archipelago and Redibook Merge, Vie for Lion’s Share of Nasdaq
CHICAGO and JERSEY CITY, N.J.--Archipelago and Redibook announced their intention to merge, creating the largest ECN in terms of market share.
Redibook part-owner and Goldman Sachs subsidiary Spear, Leeds & Kellogg will provide clearing services, Nasdaq connectivity and technology for the ECN portion of the combined entity, says Redibook CEO Larry Leibowitz.
The Redibook matching engine will be run under the Archipelago name until the system migrates over to the Archipelago engine. That will happen when both NYSE and Nasdaq stocks are supported on the Archipelago Exchange, or Arcaex, the regulated execution facility for the Pacific Exchange (TTW, Nov. 5).
The combined system will use Redibook’s redundancy framework, with real-time dual backup. The order-routing algorithms of both systems will be combined. A total migration plan has not been worked out, as regulatory approval is probably at least a month away.
"The idea is to give customers all that they had on both systems, not less of each," Leibowitz says.
"The important thing to remember is that it will be seamless to the customer," adds Archipelago CEO Gerry Putnam.
The two ECNs have a similar business model, where the ECN seeks the best deal and shows the books of other ECNs, routing out the orders to wherever the best price lies, even when that means that Archipelago or Redibook will incur transaction and access costs.
Both ECNs route about 40 percent of their volume to other venues; ten percent of that volume is to each other. About half the out-routed orders go to market makers.
Merging the two entities will create a large liquidity pool and a "suction effect," says Putnam. His belief is that, despite significant customer overlap, the increased liquidity will lead to more internally matched orders and thus fewer transaction costs. Putnam and Leibowitz say they expect most of their growth to come from the buy side through broker sponsorship programs.
"The savings will come from more internal matches, fewer outside interactions, fewer Nasdaq fees and fewer liquidity fees," Putnam says.
Archipelago has already made a bid to avert some Nasdaq fees and gain tape (quote-display) revenue by becoming the Archipelago Exchange, delivering access to the NYSE and Nasdaq (TTW, Nov. 5). Arcaex will roll out listed-stock support in early 2002 with Nasdaq stocks to follow.
"I’m not sure how friendly a place Nasdaq will be for an ECN in Supermontage," Putnam says. "One of the reasons we pursued the exchange route is to get out from underneath a competitor/regulator."
Nasdaq recently implemented a series of price changes to support its Supermontage and SuperSOES order-entry platforms that has been particularly unpopular with ECNs (TTW, Oct. 22). The Island ECN moved to join the Cincinnati Stock Exchange for similar reasons (TTW, Nov. 19).
Shares of Instinet, currently the largest ECN, plummeted 14 percent on the news.
Instinet had 13.7 percent of matched ECN volume as a percentage of reported Nasdaq volume in the third quarter, according to JP Morgan Chase H&Q (Hanbrecht &Quist) analyst Greg Smith. Island came in with 9.4 percent, Redibook with 4.7 percent and Archipelago registered 2.4 percent.
In October, the two ECNs handled a combined 460 million shares of Nasdaq and listed volume per day, and have over the last two quarters been the fastest-growing ECNs in terms of volume, the companies say.
Archipelago does not have any volume goals, Leibowitz says. But Putnam says "the endgame is a large electronic stock exchange, doing everything you can to facilitate entry into the marketplace."
No staff cuts are planned, as Leibowitz is the sole employee of Redibook. He will become an executive vice president at Charles Schwab, overseeing trading and connectivity.
According to Smith, Instinet’s market share of total ECN volume is 38.4 percent, Redibook’s is 15.9 percent, the Island ECN is 18/2 percent, and Archipelago’s is 9.4 percent.
Redibook’s volume grew 69.3 percent between the third quarters of 2000 and 2001, and Archipelago’s grew 86.2 percent. Instinet lost 0.2 percent of its volume over the period.
Daniel Safarik
